The U.K. economy unexpectedly contracted in October due to uncertainty from businesses and consumers before the new government’s budget announcement. The Office for National Statistics (ONS) reported a 0.1% monthly decrease in Gross Domestic Product (GDP), mainly attributed to a drop in production output. Economists had anticipated a 0.1% GDP increase for October, making it the second consecutive economic decline following a 0.1% drop in September.
The ONS estimated a 0.1% growth in real GDP for the three months leading up to October compared to the previous three months ending in July. Following the disappointing GDP data, the British pound weakened by 0.3% against the U.S. dollar, trading at $1.2627 by 7:45 a.m. London time.
U.K. Finance Minister Rachel Reeves acknowledged the disappointing October figures but defended the government’s economic strategies, emphasizing policies aimed at fostering long-term economic growth. Reeves highlighted initiatives like a corporation tax cap and a 10-year infrastructure strategy introduced in the government’s first budget since taking office in July.
The budget proposed tax increases amounting to £40 billion ($50.5 billion), including a rise in employer National Insurance payments and capital gains tax, along with the elimination of winter fuel payments for pensioners. Some policies faced criticism, particularly the national insurance payroll tax hike, which raised concerns among businesses about hiring new employees.
Despite the challenging economic conditions, the Bank of England is expected to maintain a gradual approach to lowering interest rates. The central bank reduced rates by 25 basis points in November and is projected to keep rates steady at 4.75% in the upcoming meeting. Economists like Thomas Pugh from RSM warned of potential stagflation risks as inflation in Britain approached 3%, impacting the economy’s growth outlook.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, expressed skepticism about a rate cut in December, citing concerns about inflation. Thiru suggested that policymakers might delay further policy adjustments until February despite the challenging economic data.
