Economy shrinks for two consecutive months, first since Covid onset

THE UK economy shrank for the second consecutive month in October, marking the first back-to-back decline in output since the Covid-19 pandemic, according to data from the Office for National Statistics (ONS).

Gross domestic product (GDP) fell by 0.1 per cent in October, mirroring the decline recorded in September.

This consecutive contraction in GDP was last seen in March and April 2020, during Britain’s first coronavirus lockdown.

Economists polled by Reuters had predicted a modest expansion of 0.1 per cent for October, but the data fell short of expectations.

The ONS noted "mixed" anecdotal evidence from companies about turnover, with some delaying activity due to uncertainty surrounding the government’s budget statement on 30 October. The budget introduced significant tax hikes on businesses, while some firms brought forward activity in anticipation of the changes.

The services sector remained stagnant in October, while the manufacturing and construction sectors experienced declines. The figures reflect the economic environment in the lead-up to Labour chancellor Rachel Reeves' first budget. Reeves, along with prime minister Keir Starmer, had warned that the budget would involve difficult tax decisions to drive long-term growth.

“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” Reeves said in a statement.

Opposition Conservatives criticised the economic outlook under Labour, pointing to the impact of recent policy decisions. "It is no wonder businesses are sounding the alarm," said Mel Stride, the Conservative Party’s economic spokesperson. "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) predicted the economy would stagnate in the final quarter of 2024. While most forecasters expect Reeves’ budget to boost growth in 2025, business groups remain concerned about the burden of higher social security contributions.

Separate ONS trade data showed a drop in goods imports and exports in October, with exports to the European Union exceeding those to the rest of the world for the first time in nearly a year.

Sterling fell briefly against the US dollar after the GDP data release but later regained some ground. Investors are pricing in multiple Bank of England rate cuts by the end of next year.

Paul Dales, chief UK economist at Capital Economics, said the Bank of England is unlikely to adjust its interest rates based on this data. However, he noted, “We’re not as confident about that as we were before this data release.”

Last month, the Bank of England revised its 2024 growth forecast downward from 1.25 per cent to 1 per cent, while predicting stronger growth of 1.5 per cent in 2025, partly reflecting the expected impact of Reeves’ budget.

The economy has struggled to regain momentum since the pandemic. Among major advanced economies, only Germany has fared worse, partly due to energy cost increases following Russia’s invasion of Ukraine.

(With inputs from Reuters)