UK GDP: Economy shrinks in October with Budget fallout still to come 

UK GDP: Economy shrinks in October with Budget fallout still to come by Rob Morgan, Chief Investment Analyst at Charles Stanley 

Following an almost flat third quarter of 2024, today’s GDP growth number of -0.1% for October shows the fourth quarter got off to a poor start.

This continues a trend of marked deceleration compared with the first half of the year. GDP increased 0.7% and 0.5% in the first and second quarters respectively, while the third quarter barely registered any growth at 0.1%.

The subdued performance mostly stems from a downturn in industrial output, manufacturing and construction, suggesting a drop off in business and consumer confidence ahead of the autumn Budget. It doesn’t bode well for the rest of the fourth quarter when we will start to see the full reaction of businesses and consumers to that fiscal event.

Some businesses are expected to retrench following announced increases to employer National Insurance and other measures, though the busy Christmas period offers a potential reprieve for consumer-facing sectors.

Meanwhile, additional government spending is expected to increase economic activity into 2025 before falling back. This should add to short term demand, although tax hikes and the need for the Bank of England to maintain stricter monetary policy could constrain activity elsewhere.

 
Can the UK avoid stagnation?
 

Overall, the growth picture is febrile with businesses enduring a pincer movement of constrictive interest rates and higher costs. Households are also feeling the pinch as they continue to battle higher cost of living and borrowing costs.

Going forward the omens are slightly better. The UK economy stands to benefit as the Bank of England gradually reduces interest rates. The picture for many households is also improving with wage growth currently trending above price rises. This is restoring spending power lost in the post-Covid inflation surge. All else being equal, business confidence should be gathering pace and stimulating economic activity.

Yet there is a real risk global and domestic inflation remains on the high side, limiting the scope for interest rate cuts. This would keep the handbrake on economic activity even without the additional costs that employers are now going to be taking on following measures unveiled in the Budget. Overall, it is very difficult for businesses to retain confidence going forward.

There’s an urgent need for decisive measures to increase investment and productivity to get the wheels of commerce turning faster, benefitting all parts of society with better growth and a higher overall tax take.

 
What does it mean for interest rates? 
 

The pedestrian growth picture certainly won’t prompt inflationary concerns among the MPC decision makers at the Bank of England.

Today’s weak number marginally increases the chance of a further cut to interest rates at the Bank of England’s December meeting next week, though the likely outcome is a pause as MPC members monitor the inflationary impact of the Budget.

Overall, a shallow trajectory of cuts towards the 4% level over the course of the next year still looks a likely scenario. The more inflationary picture emanating from the US and continued sticky wages and services prices call for only a gradual withdrawal of restrictive policy.