The UK economy contracted for the second consecutive month in October, with official data from the Office for National Statistics (ONS) showing a 0.1% decline. The disappointing performance came despite expectations for a rebound after September’s fall, raising concerns about the nation’s economic health.
Key sectors like pubs, restaurants, and retail reported sluggish activity, while businesses and consumers held back on spending amid uncertainty surrounding the government’s Budget announcement in late October.
Why Is the UK Economy Struggling?
Several factors are contributing to the economic slowdown:
1. Budget Uncertainty
Businesses and consumers exercised caution ahead of Chancellor Rachel Reeves’ October Budget. According to KPMG’s chief economist, Yael Selfin, this uncertainty led to delayed spending and investments.
However, some industries, such as real estate, legal firms, and accountancy, experienced a temporary boost as they accelerated work ahead of the Budget announcement.
2. High Interest Rates
At 4.75%, the Bank of England’s interest rates remain relatively high, making borrowing more expensive for both businesses and individuals. Despite two rate cuts earlier in the year, economists believe the drag from higher rates is lingering longer than anticipated.
Paul Dales, chief UK economist at Capital Economics, noted:
“It’s not just the Budget holding the economy back. The higher interest rates are having a lasting impact.”
3. Stagnant Consumer Confidence
A GfK survey revealed that while people are slightly more optimistic about their personal finances for the coming year, their views on the broader UK economy remain unchanged. Neil Bellamy, consumer insights director at NIQ GfK, described this as a “continuing uncharitable view” of the nation’s economic situation.
Sector-Specific Challenges
1. Manufacturing and Construction Declines
- Manufacturing: Activity dropped by 0.6% in October, marking the sharpest decline among major sectors.
- Construction: The industry saw a 0.4% contraction, reflecting weak demand and rising costs.
2. Services Sector Stalls
The services sector, which accounts for the majority of the UK’s economic output, recorded zero growth in October. This stagnation highlights a broader issue of subdued consumer and business activity.
3. Retail Struggles Continue
Retail businesses have faced tough conditions throughout 2024. Rick Gaglio, owner of Twisted Fabric, a menswear shop in Hertfordshire, noted:
“Customers are feeling the pinch from inflation and high prices. It’s been a very tough year for small businesses.”
Government Response
Chancellor Rachel Reeves acknowledged the disappointing figures but reaffirmed her commitment to policies aimed at long-term growth. In contrast, Shadow Chancellor Mel Stride criticized Reeves, claiming the economic contraction reflects the government’s poor decision-making.
Prime Minister Sir Keir Starmer has set ambitious economic goals, including achieving the highest sustained growth among G7 nations. He has also pledged to build 1.5 million homes in England and boost real household disposable incomes.
Mixed Signals in the Broader Economy
Despite the monthly contraction, the economy expanded by 0.1% over the three months leading up to October. However, experts caution against overinterpreting these initial figures, as they are subject to revisions by the ONS.
Looking ahead, the Bank of England is not expected to reduce interest rates further until next year. Many economists believe that additional measures will be needed to stimulate growth and rebuild confidence.
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