Britain’s economy shrank by 0.1% in October, underlining the scale of Labour’s challenge to get the economy growing.
Figures from the Office for National Statistics showed the unexpected fall in GDP was driven by declines in construction and production, while the dominant services sector stagnated.
Economists, polled by Reuters, had expected the economy to grow by 0.1%. It follows a decline of 0.1% in September and sluggish growth of 0.1% in the third quarter of the year, according to figures last month.
Keir Starmer said last week it was the government’s “aim” to make the UK the fastest-growing G7 economy, while pledging to deliver higher real household disposable income by 2029.
However, a range of companies have said they plan to slow spending and hiring after Labour’s budget in October, which included £40bn of tax rises.
Economists said the second successive monthly contraction in GDP meant the economy had grown for only one of the five months to October, and might mean the economy shrank for the fourth quarter as a whole.
The chancellor, Rachel Reeves, said the figures were “disappointing” but insisted Labour was putting the economy back on track for growth.
“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth,” said Reeves. “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.”
Business groups have complained that measures announced in the budget, including an increase in employer national insurance contributions, add to their costs and deter investment.
Production output fell by 0.6% in October because of falls in manufacturing, mining and quarrying, while construction fell by 0.4%.
“The economy contracted slightly in October, with services showing no growth overall and production and construction both falling,” said Liz McKeown, the director of economic statistics at the ONS.
“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics and legal firms.”
Paul Dales, the chief UK economist at Capital Economics, said it was “hard to tell how much of the fall is temporary as activity was put on hold ahead of the budget”.
“The clear risk is that more activity was cancelled or postponed after the budget,” he said, citing weak PMI data. “There is every chance that the economy went backwards in the fourth quarter as a whole.”
Figures last week showed that growth in the UK’s dominant services sector slowed to its lowest rate in more than a year in November as firms digested business tax rises in the budget.
The closely watched S&P Global UK services PMI survey scored 50.8 in November, slowing from 52.0 in October.
The pound fell to its lowest level against the US dollar in nearly two weeks, dropping as much as 0.4% in early trading.
Analysts said the contraction in the UK economy could make it more likely that the Bank of England monetary policy committee will vote to cut the base rate when they meet later this month.
“These latest figures will send a chill through the corridors of Westminster, as the government’s growth agenda looks increasingly at risk,” said Isaac Stell, investment manager at Wealth Club.
“With more and more companies stating they will cut back on hiring and investment to deal with the rising costs related to the budget, the question will be, where will growth actually come from?”
The disappointing growth figures came as a survey by GfK showed that consumer confidence remained suppressed in December amid the “continuing uncharitable view on the UK’s general economic situation”.
The market research company’s latest consumer confidence survey said that consumers “don’t know where they are going” and are still thinking twice about big-ticket purchases.
Anna Leach, the chief economist at the Institute of Director, said: “As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs.
“The recent blows to businesses have made the task of achieving stronger sustainable growth harder.”
Separate ONS trade data showed imports and exports of goods fell in October. Exports to the European Union were higher than exports to the rest of the world for the first time in nearly a year.
“A weakening export climate amid rising global policy uncertainties and declining business confidence, exacerbated by the impact of recently announced budget measures, raises concerns about sustaining the growth momentum,” Hailey Low, associate economist at NIESR, said.
Last month, the Bank trimmed its annual growth forecast for 2024 to 1% from 1.25% but predicted a stronger 2025 with 1.5% growth, reflecting a short-term boost to the economy from the budget.
