The UK economy slowed to a near-standstill in the third quarter as uncertainty surrounding Labour’s first budget and high interest rates weighed on business and consumer spending.
In a blow to the chancellor, Rachel Reeves, as she attempts push the UK to the top of the G7 growth league, the economy grew by 0.1% in the third quarter of the year, down from 0.5% in the second quarter, according to figures from the Office for National Statistics (ONS).
The UK ranked sixth in the G7 for growth in the third quarter, above Italy but below France, Germany and the US, which grew by o.4%, 0.2% and 0.7% respectively.
Figures released by the ONS on Friday showed that in the three months to the end of September – the first quarter under the new Labour government – services and manufacturing sector output slowed, indicating that uncertainty surrounding the budget and high interest rates contributed to a loss of momentum since the spring.
City economists had expected quarter-on-quarter growth to be 0.2%. Month-on-month GDP shrank by 0.1% in September, falling short of forecasts for growth of 0.2%.
The ONS said a fall in manufacturing output and a lack of work in the IT sector dragged on the economy in September, offsetting a rise in car sales.
Business investment increased 4.5% from the same period in 2023, but Britain’s trade position deteriorated further after a third consecutive fall in exports. The damage to trade was offset by a fall in imports as consumers cut back on purchases of foreign goods.
Reeves said: “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers.”
Business groups have complained that measures announced in the budget, including an increase in employer national insurance contributions, adds to their costs and deters investment.
The shadow chancellor, Mel Stride, said Labour inherited the fastest-growing economy in the G7, which also includes Canada and Japan, “but because of their choices growth has now slowed significantly”.
He added: “Labour’s national insurance jobs tax will make it more expensive for businesses, which will then fuel higher prices, higher inflation, higher mortgage costs and slower growth.”
ONS figures showed that the UK’s growing population meant the share of the economy per head declined by 0.1% in the third quarter.
Reeves added: “At my budget, I took the difficult choices to fix the foundations and stabilise our public finances. Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal.”
Ben Jones, the lead economist at the CBI business lobby group, said: “The UK economy stalled over the third quarter. Uncertainty ahead of the budget probably played a big part, with firms widely reporting a slowdown in decision making.
“Hopefully this will prove to be a blip. We still expect the economy to return to a path of modest growth in the year ahead. But downside risks to the outlook have increased.”
Recent surveys of the economy have shown the labour market weakening and consumer and business confidence had fallen before the budget.
Consumer-facing services increased by 0.5%, but not by enough to push the overall services sector above 0.1% growth during the quarter.
The National Institute of Economic and Social Research (NIESR) said the weak data in the three months to September would translate into a loss of momentum going into the fourth quarter.
Hailey Low, an economist at NIESR, said manufacturing would be among the sectors to slow further. “Policymakers across the country need to look beyond short-term fixes if raising long run trend growth is the ultimate goal,” she said.
Luke Bartholomew, the deputy chief economist at the investment manager abrdn, said while an easing in growth was expected in the second half of the year, “the extent of the slowdown is a bit more pronounced than expected”.
The Bank of England has cut interest rates twice this year, most recently last week, when it reduced the base rate to 4.75%. However, borrowing costs remain high compared with pre-pandemic levels and financial markets have signalled a rate cut in December is unlikely. According to the money markets on Friday, there is a 17.5% chance of a UK interest rate cut next month and an 82.5% chance of them being left on hold.
