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The UK financial system unexpectedly shrank 0.1 per cent in October, the second contraction in a row, in a blow to the Labour authorities’s financial agenda.
The month-to-month change in GDP printed on Friday by the Workplace for Nationwide Statistics undershot the 0.1 per cent enlargement forecast by economists polled by Reuters. It adopted a 0.1 per cent contraction within the earlier month.
Sterling was down 0.3 per cent in opposition to the greenback to $1.263. The yield on the two-year gilt, which strikes inversely to costs, fell 0.02 share factors to 4.26 per cent.
The figures underscore the financial problem for the brand new Labour authorities, which gained the UK normal election in July with a manifesto dedication to “safe the best sustained progress within the G7”.
Labour has since sought to handle expectations, with chancellor Rachel Reeves warning of a grim inheritance within the public funds together with a £22bn fiscal “black gap” forward of her tax-raising October Finances.
“Whereas the figures this month are disappointing, we now have put in place insurance policies to ship long-term financial progress,” Reeves stated on Friday.
The Conservatives claimed the poor progress figures mirrored the influence on enterprise of Reeves’ gloomy post-election rhetoric on the financial system.
Mel Stride, shadow chancellor, stated on Friday: “It’s no surprise companies are sounding the alarm. This fall in progress exhibits the stark influence of the chancellor’s choices and regularly speaking down the financial system.”
Friday’s figures level to a weak begin to the fourth quarter after annual financial progress slowed to 0.1 per cent within the three months to September, down from 0.5 per cent within the earlier quarter.
Paul Dales, chief UK economist at Capital Economics, famous that the financial system had grown in simply one of many 5 months to October, and that progress was now 0.1 per cent decrease than earlier than Labour got here into energy.
“That means it’s not simply the Finances that’s holding the financial system again,” he stated. “As a substitute, the drag from larger rates of interest could also be lasting longer than we thought.”
Final week the OECD reduce its 2024 progress forecast for the UK to 0.9 per cent from the 1.1 per cent that was anticipated in September on account of weaker incoming information.
Nonetheless, it expects progress to speed up to 1.7 per cent in 2025. That determine is weaker than the two.4 per cent enlargement forecast for the US however stronger than the 1.3 per cent for the Eurozone.
In accordance with Friday’s ONS figures, output within the dominant providers sector registered no progress in October, with manufacturing contracting 0.6 per cent and development registering a 0.4 per cent fall.
“The chance of a quarterly contraction [in the final three months of the year] is not negligible,” stated Sanjay Raja, economist at Deutsche Financial institution, noting {that a} doable commerce warfare when President-elect Donald Trump re-enters the White Home represented a big exterior headwind.
ONS director of financial statistics Liz McKeown stated: “Oil and gasoline extraction, pubs and eating places and retail all had weak months, partially offset by progress in telecoms, logistics and authorized corporations.”
Separate information printed on Friday by analysis firm GfK confirmed shopper confidence remained low in November, edging up just one level to minus 17 in December.
The ONS reported combined feedback from companies regarding the Finances. These negatively affected stated turnover was hit as clients waited for bulletins from the chancellor.
Nonetheless, others stated exercise had been introduced ahead in anticipation of assorted Finances measures.
UK Prime Minister Sir Keir Starmer not too long ago introduced he would goal family disposable earnings as a brand new “milestone” for score the success of his financial insurance policies.
Excessive borrowing prices are nonetheless limiting family spending and enterprise exercise, however they’ve come down from their peak after the Financial institution of England reduce rates of interest in August and November to the present 4.75 per cent.
Markets anticipate extra fee cuts subsequent yr as inflation eases from its multi-decade excessive reached in 2022.
James Smith, economist at ING, stated he believed the UK financial system was nonetheless “poised to outpace most of western Europe subsequent yr” since Labour elevated public spending by greater than 2 per cent of GDP in contrast with the Conservatives’ Finances plans.
Further reporting by George Parker and Jim Pickard
