UK GDP sees unexpected fall of 0.1%

UK GDP unexpectedly shrank in both October and the three-month period, the latest ONS figures show. 

GDP fell 0.1% month-on-month in October, below expectations for 0.1% growth and following a 0.1% fall in September.

GDP also fell by 0.1% in the three months to October.

The data shows that service-sector growth stalled, production declined — driven by further drops in motor-vehicle manufacturing — and construction weakened. 

Industry experts now expect the Bank of England's Monetary Policy Committee to cut interest rates in next week's meeting, with some predicting "a supersize 0.5% cut".

James Bentley, director at Financial Markets Online, commented: “Britain’s economy has been lit up, not with festive sparkle but by warning lights.

“Cooling has turned into contraction, and at this rate the Christmas interest rate cut will get a sequel by February. 

“Things have gone from bad to worse for manufacturers, with sector output shrinking by 0.7% in the three months to October. The construction sector, often seen as a barometer for broader business confidence, also contracted by 0.3%. Private sector housebuilding - the photo opp of choice for Chancellors - shrank by a humiliating 2.4%.

“Meanwhile the UK’s huge service sector, engine room of the economy, idled with zero growth.

“With unemployment up at 5% and the economy sliding, the question now isn’t whether the Bank of England will cut interest rates next week, it’s how big will the cut be?

“While the markets have been expecting a 0.25% cut for weeks, there’s now a possibility of a supersize 0.5% cut.

“The Bank is confident that inflation, though still high at 3.6%, has peaked - and its entire focus is now on stimulating the moribund economy.

“Even if we don’t get a double cut next week, the chances of a further base rate cut coming in February have risen sharply.

“Cue a screeching U-turn for the Pound, which had been on a winning streak against the Dollar this week. Sterling has plunged deep into the red and UK equities are rattled.

“If the data from the month before the Chancellor’s tax-raising Budget was this bad, how much worse will the November and December numbers look? Cheerio Christmas cheer.”

Derrick Dunne, CEO of YOU Asset Management, said: “A contraction in October confirms the economy entered the run-up to the Autumn Budget on the back foot. Businesses paused investment, households delayed spending and, as a result, momentum slipped further.

“The measures announced by Rachel Reeves’ on 26 November may strengthen the public finances, but a £26 billion hike in tax rises offers little that will lift economic growth in the near term. It is a risky trade-off at a time when the economy is already losing altitude.

“For the Bank of England, a month of contracted growth strengthens the view that monetary policy is now tighter than the economy can comfortably weather. Today’s reading adds weight to the expectation that its Monetary Policy Committee will cut rates next week in an effort to stop this downturn evolving into something more severe."

Jeremy Batstone Carr, European Strategist at Raymond James Investment Services, added: “Today’s data confirms economic activity contracted at the beginning of the fourth quarter, with the economy having ended the third on a downbeat note. Weakness in both services and industrial production have combined to ensure that activity ahead of the Budget remained very subdued. 

“With such downbeat pre-Budget headlines, it was unsurprising that, just as last year, household and business confidence began Q4 at a low. Admittedly, consumers may have been waiting for Black Friday sales rather than heading to the shops, with other areas of household spending faring better. Overall, however, service sector activity remained very weak, with the headline data also reflecting the adverse impact of scientific research and a sharp deterioration in the construction sector. 

“Industrial activity improved following the third quarter but remains at a low ebb, while weather conditions approximating seasonal norms ensured that utility output, closely associated with climatic conditions, neither added to nor detracted from the overall outcome. 

“Looking ahead, rate-setters at the Bank of England will view today’s release, in conjunction with inflation-reducing Budget measures, as no impediment to a pre-Christmas interest rate cut. Although next week’s decision will rest on forthcoming employment, wage and inflation data, there is nothing in today’s release to cause the Committee’s doves to change their position. In fact, several of the hawks whose votes ensured the previous decision was a very close call may feel sufficiently mollified to dial back their wariness.”