UK Economy Contracts for Second Consecutive Month in October Amid Pre-Budget Uncertainty

UK Economy Sees Unexpected Contraction in October

The United Kingdom's economy experienced an unexpected contraction in October 2023, shrinking by 0.1%. This marks the second consecutive month of decline, following a similar 0.1% drop in September, according to official figures released by the Office for National Statistics (ONS). The contraction defied economists' predictions, who had largely forecast a 0.1% expansion for the month.

The latest data has contributed to what analysts describe as 'pre-Budget jitters' ahead of the government's Autumn Statement, which was delivered by Chancellor Jeremy Hunt on November 22, 2023.

Sectoral Performance Highlights Weakness

The ONS report indicated widespread weakness across key sectors of the economy:

• The dominant services sector, which accounts for over 80% of the UK economy, saw a contraction of 0.2% in October. This was primarily driven by falls in areas such as information and communication, car sales, broader retail spending, computer programming, and consultancy activities.
• Production output fell by 0.8% in October, with manufacturing alone decreasing by 1.1%.
• The construction sector also experienced a decline, contracting by 0.5%.

Despite the resumption of operations at Jaguar Land Rover (JLR) in October after a significant cyberattack had disrupted its production in September, the manufacturing sector's recovery was weaker than anticipated. The cyberattack had notably impacted September's economic figures.

Implications for Monetary Policy and Political Reaction

The unexpected economic downturn has intensified expectations for the Bank of England to consider cutting interest rates. Economists widely anticipate a 25 basis point reduction, potentially bringing the base rate to 3.75%, with a decision expected in the near future.

The economic figures have drawn reactions from political figures. A Treasury spokesperson affirmed the government's determination 'to defy the forecasts on growth and create good jobs'. Conversely, Shadow Chancellor Rachel Reeves attributed the economic weakness to the government's 'economic mismanagement'.

Broader Economic Context and Outlook

The UK economy has experienced slow growth since early 2022, grappling with high inflation and rising interest rates. The three-month period leading up to October 2023 also showed either no growth or a slight contraction of 0.1%, indicating a broader slowdown. Analysts suggest that caution among businesses and households in the run-up to the Autumn Statement, driven by speculation over potential tax measures, contributed to the subdued activity.