UK Economy Contracts for Second Consecutive Month

Britain's economy shrank for the second consecutive month in October, marking the first back-to-back monthly declines since the onset of the COVID-19 pandemic, reports Reuters. This setback comes as the new Labour government prepares for its first budget and presents a challenge for Finance Minister Rachel Reeves.

Gross domestic product (GDP) contracted by 0.1% month-on-month in October, mirroring September's decline, according to the Office for National Statistics (ONS). This is the first instance of consecutive monthly GDP drops since March and April 2020, when the UK implemented its initial coronavirus lockdown. Economists had anticipated a 0.1% monthly expansion.

The ONS noted mixed anecdotal evidence from companies suggesting that turnover had been affected by businesses awaiting the budget statement, which introduced significant tax increases for businesses. Some companies reportedly brought forward their activity.

The services sector stagnated, while manufacturing and construction industries saw declines in October. This data reflects economic performance in the weeks leading up to Reeves' budget statement on October 30.

Reeves, along with Prime Minister Keir Starmer, had previously warned that the budget would necessitate painful tax increases to address the UK's economic challenges. Friday's GDP data adds to a string of disappointing economic indicators for Britain, with business surveys and retail sales readings also showing weakness.

"While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth," Reeves stated in a press release.

The opposition Conservatives, however, argued that the growth outlook is under considerable pressure due to Labour's initial policy decisions.

"It is no wonder businesses are sounding the alarm," said Mel Stride, the Conservatives' spokesperson on the economy. "This fall in growth shows the stark impact of the Chancellor's decisions and continually talking down the economy."

The National Institute of Economic and Social Research (NIESR), a leading think tank, anticipates that the economy will stagnate in the final quarter of 2024. Most forecasters, however, believe that the budget's focus on increased public investment and spending will contribute to faster economic growth in 2025. Business groups, however, warn that employers will face challenges due to higher social security contributions.

Despite the recent economic setbacks, consumer confidence rose modestly in December, according to a survey published on Friday, offering some solace to Reeves amidst a series of gloomy business reports.

Sterling fell sharply against the US dollar following the GDP data release before partially recovering. Investors continue to anticipate interest rate cuts from the Bank of England (BoE) in the coming year.

Paul Dales, chief UK economist at Capital Economics, suggested that the BoE is unlikely to react to the GDP data by cutting rates at its upcoming meeting. "That said, we're not as confident about that as we were before this data release," he added.

The BoE had previously lowered its annual growth forecast for 2024 to 1% from 1.25% but projected stronger growth in 2025 at 1.5%, reflecting the anticipated short-term economic boost from Reeves' budget.

Britain's economic growth has been relatively slow since the pandemic. Among the largest advanced economies, only Germany, which also faced significant challenges due to surging energy costs following Russia's invasion of Ukraine, has performed noticeably worse.

Separate ONS trade data revealed declines in both goods imports and exports in October. Exports to the European Union surpassed exports to the rest of the world for the first time in nearly a year.