The UK economy has faced another setback as it shrank by 0.1% in October, marking the second consecutive month of contraction. This latest dip, reported by the Office for National Statistics (ONS), was unexpected for many economists who had anticipated at least modest growth. The last time the economy experienced such back-to-back declines was during the early days of the COVID-19 pandemic, showcasing the mounting challenges confronted by the Labour government under Chancellor Rachel Reeves.
This contraction paints a dismal picture as it follows the UK's earlier status as the fastest-growing economy among the G7 nations at the start of 2024. The news arrived just prior to the government's first budget proposal, which unveiled £40 billion worth of tax increases aimed at stabilizing public finances. Industries like manufacturing, retail, and recruitment reported weakened revenues as businesses hesitated to invest amid looming budgetary changes.
Reeves acknowledged the disappointing figures but defended the government's fiscal policies, asserting, "We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere. This is what our Plan for Change is all about." She outlined several strategies intended to stimulate growth, including establishing a £70 billion National Wealth Fund, launching a decade-long infrastructure plan, and maintaining the lowest corporation tax rate within the G7.
The economic slowdown has also raised concerns about consumer confidence and spending habits. With the service sector showing no growth and other sectors such as production and construction witnessing declines, the overall economic atmosphere feels tense. Notably, sectors including oil and gas extraction, along with pubs and restaurants, reported weaker performance this past month. Conversely, there was modest growth within telecoms, logistics, and legal services, reflecting mixed responses across different sectors.
The economic contraction has prompted sharp criticism from opposition leaders, particularly Mel Stride, the shadow chancellor. Stride emphasized the adverse effects of the declining growth, forewarning families of the repercussions: "This fall in growth shows the stark impact of the Chancellor's decisions and continually talking down the economy. The impact will be felt by families through higher taxes, fewer jobs, higher prices, and higher interest rates."
The Confederation of British Industry (CBI) offered somewhat contrasting sentiments, expressing cautious optimism. They suggested UK firms continue to hold onto hope for eventual improvement, stating, "Businesses can probably still look forward to steady, if unspectacular, economic recovery next year as the impact of the inflation shock fades and interest rates come down. With the right government support, business confidence could be restored, laying the groundwork for innovation and growth."
The bleak economic outlook is compounded by external factors, including geopolitical uncertainties and the aftermath of the recent budget policies. The government’s strategy has increasingly relied on directing growth through public sector investment, aimed at bolstering the economy through substantial spending initiatives like those planned for the National Health Service.
Critics, including some within the business community, argue these taxation burdens—especially the rise in national insurance contributions—will stifle growth by reducing disposable income and leading to potential wage stagnation or job cuts. Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, commented, "The contraction in October will be concerning for the new Government as it offers a stark reflection of the hit to the economy from the uncertainty surrounding the budget when consumers and businesses descended temporarily state of panic."
October’s figures reveal the UK’s production output fell by 0.6%, driven by declines in manufacturing and mining. This downturn significantly factors as both challenges to current governmental strategies and indicators of public sentiment. Yael Selfin, Chief Economist at KPMG UK, noted, "October activity was held back by uncertainty leading up to the budget, with consumer and business confidence near recent lows.”
Despite this, there remains some hope for recovery as financial forecasts suggest improvements stemming from increased public expenditure next year, coupled with anticipated interest rate cuts. The resilience of the UK economy continues to wane, caught between tax increases and global challenges. How this will impact Christmas consumer spending and broader economic activities remains to be seen. Many households may choose to tighten their belts as they brace for the uncertain economic terrain heading toward 2025.
