UK Economy Experiences Consecutive Contraction Ahead of Budget
The UK economy unexpectedly contracted for a second consecutive month leading up to the government budget, as uncertainty surrounding Labour’s economic strategies caused households and businesses to pause spending.
According to official statistics, economic output shrank by 0.1 percent in October, falling short of the anticipated 0.1 percent growth predicted by economists. This follows a similar contraction in September, marking two months of economic decline.
The Office for National Statistics reported that the services sector, a key component of the UK economy, remained stagnant in October. Additionally, significant declines were observed in the construction and manufacturing industries, although there was a slight increase of 0.1 percent in output over the three months leading to October.
Surveys conducted before the budget indicated a drop in confidence among households and businesses, with many delaying spending decisions until after October 30. The ONS noted that various sectors, including manufacturers, wholesalers, retailers, computer programmers, professional services, and employment agencies, expressed concerns regarding their turnover as the government cautioned about necessary “tough choices” to ensure the stability of public services.
Conversely, firms in the property, legal, and accounting sectors reported favorable effects and accelerated activities in anticipation of forthcoming announcements, according to the ONS.
Benjamin Nabarro, a UK economist at Citi, remarked, “There is evidence suggesting that acute budget uncertainty is impacting activity, alongside weaknesses in certain volatile sectors, some of which may see a rebound.”
After experiencing robust growth earlier this year, the UK’s economic expansion has stalled in the latter half of the year. Following a strong recovery from a minor recession at the start of 2024, government officials stated that the recent poor growth figures reflect a return to the economy’s underlying growth rate rather than the immediate effects of the budget introduced on October 30.
In her initial budget announcement, Chancellor Rachel Reeves presented tax increases totaling £40 billion, modifications to the government’s fiscal guidelines, and an advance in state expenditures.
Addressing the GDP figures, she stated, “We are committed to fostering economic growth, as increasing growth equates to improved living standards for all. While these figures are disappointing, we have implemented strategies aimed at achieving sustained economic growth.”
The figures for October also signify the beginning of the fourth quarter, where economists express caution regarding a stagnant conclusion to the year. Predictions indicate growth may only be around 0.2 to 0.3 percent in the final three months, in comparison to 0.7 percent and 0.5 percent seen in the first and second quarters, respectively. Analysts from Pantheon Macroeconomics have adjusted their forecasts for the fourth quarter down to 0.1 percent. The National Institute for Economics and Social Research (NIESR) anticipates the economy will stagnate by year-end, with negligible growth in both the services and production sectors, alongside a slight decrease in construction.
Hailey Low, an associate economist at NIESR, warned, “The weakening export climate, coupled with rising global policy uncertainties and declining business confidence—intensified by the newly announced budget measures—raises concerns about maintaining growth momentum.”
As per the latest forecasts from the Organisation for Economic Co-operation and Development, increased government spending is expected to provide a temporary boost to the economy, with a prediction of 1.7 percent GDP growth in 2025—the second highest in the G7, following the US.
However, forecasts suggest a significant reduction in state spending on public services after 2026, which may hinder future growth prospects and call into question Labour’s goal of becoming the top-performing G7 economy by the end of the parliamentary term.
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