Britain’s economy shrank unexpectedly by 0.3% in October as households and businesses came under growing pressure amid the cost of living crisis, raising the chances of a recession.
The Office for National Statistics said that gross domestic product (GDP) fell on the month, after growth of 0.2% in September, with contractions across all main sectors of the economy. City economists had forecast zero growth.
The UK’s dominant services sector was the biggest driver of the fall in output, with declines in IT, legal firms and film production. These were compounded by widespread falls in manufacturing and construction after poor weather led to a drop in activity.
Paul Dales, the chief UK economist at the consultancy Capital Economics, said the figure “suggests that the economy may go nowhere again in the fourth quarter, or perhaps is in the mildest of mild recessions”.
The figures come as the Bank of England prepares to keep interest rates on hold on Thursday for a third consecutive time against a backdrop of stubbornly high inflation and growing concerns over the impact of 14 previous increases on households and businesses.
While inflation has fallen back in recent months, officials at Threadneedle Street, including the Bank’s governor, Andrew Bailey, have warned that borrowing costs will need to remain high for a prolonged period to ensure it falls back to the 2% target set by the government.
Inflation fell back from 6.7% in September to 4.6% in October. Official figures for November are due to be released on Wednesday next week. The decline in the headline rate does not mean prices are going down, only that they are rising less rapidly.
With Rishi Sunak having met his primary target to halve inflation this year, the government has focused attention in recent months on his other pledge of rebooting economic growth from among the weakest periods for national output in decades. With a general election looming, the chancellor, Jeremy Hunt, announced £20bn of tax cuts for workers and businesses targeted at growing the economy.
However, economists said the prime minister was in danger of his growth target failing to be met. The Bank has also warned that Britain’s economy faces a 50-50 chance of a recession next year as higher living costs and elevated interest rates weigh heavily on households and businesses.
Rachel Reeves, the shadow chancellor, said: “Rishi Sunak ends the year having failed to deliver on his own promise to grow the economy. Economic growth is going backwards, leaving working people worse off.
“After 13 years the Conservatives have failed on the economy and after the chaos of the past few weeks Rishi Sunak is clearly too weak to deliver for Britain.”
The latest snapshot from the ONS showed output over the three months to the end of October flatlined, with zero growth compared with the three months to July.
Alongside a 0.2% decline in service sector activity in October, output in production – which includes manufacturing and energy generation – fell by 0.8%, while activity in construction shrank by 0.5%.
Five of the six industries in the IT sector fell, with the largest contributions coming from computer programming and consultancy, as well as films, video and TV production. Legal activities recorded a sharp 2.8% decline, in a slump partly offset by gains in administrative and support activities.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said the figures suggested the economy was unravelling even before the full force of interest rate increases from the Bank of England fed through to households and businesses.
“October’s negative outturn puts the prime minister’s target to get the economy growing in jeopardy, with high inflation and borrowing costs likely to suppress economic activity in November and December.”
