The UK economy slipped back into contraction in October, heightening concerns that Chancellor of the Exchequer Rachel Reeves’ first budget has dampened momentum at a delicate moment for growth.
Fresh monthly data showed broad weakness across key sectors, underscoring the challenges facing policymakers ahead of the Bank of England’s final interest-rate decision of the year.
Second consecutive month of decline
Gross domestic product fell 0.1% in October, the Office for National Statistics reported, matching September’s revised 0.1% contraction.
Economists surveyed by Bloomberg had expected a modest 0.1% gain, raising questions about the strength of the economy heading into the final quarter.
The services sector, which accounts for the majority of UK output, slipped 0.3%, while construction activity dropped 0.6%.
These declines were partially offset by a 1.1% rebound in industrial production and 0.5% growth in manufacturing, the latter supported by the restart of Jaguar Land Rover operations following a cyberattack in September.
The pound edged 0.1% lower to $1.3381 after the release.
On an annual basis, GDP rose 1.1% in October, matching the previous month but falling short of the 1.4% expansion economists had expected.
The figures suggest the economy has lost the momentum seen in the first half of the year, when the UK outpaced every other G7 country.
Budget concerns weigh on households and businesses
Uncertainty surrounding Reeves’ budget announcement — delivered in November — has been cited as a major factor holding back spending and investment decisions.
Speculation that taxes would need to rise to fund deficit reduction and welfare commitments weighed heavily on household sentiment, contributing to a sharper-than-expected drop in retail sales in October.
Reeves ultimately introduced tax increases but less aggressively than feared, giving the government more fiscal space while limiting the shock to consumers and businesses.
Still, economists say the cloud of uncertainty ahead of the Autumn budget likely deterred economic activity in October.
Business sentiment indicators point to similar caution.
Companies delayed investment decisions while waiting for fiscal clarity, adding to the drag on growth.
However, in a sign that expectations may be stabilising, the Confederation of British Industry upgraded its economic forecasts on Friday.
The business lobby now expects the UK economy to grow 1.3% in 2026, up from its previous projection of 1.0%, citing higher government spending in the aftermath of the budget. It also nudged up its growth forecast for this year to 1.4%.
Bank of England faces a tight policy call
The October GDP data is the first in a series of key releases that will guide the Bank of England’s final monetary policy meeting of 2025, scheduled for December 18.
Policymakers will receive fresh labour-market and inflation data in the coming days, shaping what is expected to be a closely balanced decision on whether to cut interest rates.
Inflation fell to 3.6% in October from 3.8% in September, its first decline since May and in line with the Bank’s expectations.
Further easing is anticipated in November’s reading. Markets widely expect the central bank to deliver a quarter-point reduction, lowering the benchmark rate from 4.0% to 3.75%.
Four of the nine Monetary Policy Committee members voted for a cut in November, signalling that the committee is nearing a pivot as price pressures continue to moderate.
But with growth weak and confidence fragile, the latest data underscores the risks of tightening budget policy just as monetary policy moves toward easing.
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