UK on ‘recession watch’ as economy contracts amid Budget chaos
The UK economy shrank 0.1 per cent in October – the second consecutive month of decline – as businesses paused investments amid consistent speculation about upcoming tax hikes in Rachel Reeves’ second Autumn Budget.
The latest figures published by the Office for National Statistics (ONS) dealt another blow to the Chancellor’s growth agenda as new data showed production output shrank 0.5 per cent, whilst construction contracted 0.3 per cent.
The all-important services sector, which is estimated to make up over 80 per cent of the economy, did not grow at all.
Economists had pencilled in growth of 0.1 per cent for the month.
Liz McKeown, director of economic statistics at the ONS, said: “The economy contracted slightly in the latest three months as production fell again and services growth stalled.”
“Within production there was continued weakness in car manufacturing, with the industry only making a slight recovery in October from the substantial fall in output seen in the previous month.”
The economy also contracted by 0.1 in September after a cyber attack on Jaguar Land Rover triggered a collapse in the manufacturing sector.
Recession ‘now a possibility’
The prospect of the UK economy shrinking over the last three months of the year is “now a possibility” after today’s grim GDP figures.
Deutsche Bank believes that Britain’s stuttering services sector – the engine room of the UK economy – and the slower than expected recovery in auto making after the JLR cyberattack, makes a quarterly contraction likely.
“For the first time this year, we see some meaningful risk of a marginal quarterly contraction in real GDP,” said Sanjay Raja, the bank’s chief UK economist. “If realised this would mark the first quarterly contraction in real GDP since Q4-23. Indeed, Budget uncertainty combined with weak hiring and rising unemployment fear will likely see spending and investment more subdued to end the year.”
A Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.
“That is why the Chancellor is taking £150 off energy bills, protecting record investment in our infrastructure, and we are backing major planning reforms, the expansion of Heathrow and Gatwick airports, and the construction of Sizewell C.”
Shadow Chancellor Mel Stride said: “This morning’s news that the economy unexpectedly shrank in the three months to October is extremely concerning but it’s as a direct result of Labour’s economic mismanagement.
“Rachel Reeves promised growth but Labour has no plan for the economy – just their own survival, that’s why Reeves presented a Benefits Budget that rewards welfare not work. For months, Rachel Reeves has misled the British public.”
Lindsay James, investment strategist at Quilter, said the fall highlights “the continuing trend of the past three months that have seen the already fragile levels of growth evaporate and completely go into reverse”.
He added: “Much of this can be put down to the Budget and the deterioration in consumer confidence, spending and business planning.
“Business and consumers were braced for tax hikes and the endless speculation and leaks have once again put a brake on the UK economy, just as it did last year.”
Economy hit by Budget leaks debacle
Businesses and consumers cut spending in the run up to the Budget amid speculation around potential tax hikes.
One of the most damaging rumours was related to potential income tax hikes. After weeks of speculation, rogue Treasury briefings to the Financial Times revealed Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer had planned and then ripped up plans for an income tax hike.
Business activity was hit as a result, with a Purchasing Managers Index (PMI) from S&P previously showing a delay in decision making for services firms ahead of Reeves’ Budget.
The government’s U-turn on income tax sent panics across markets, with the yield on 10-year UK gilts climbed by 13 basis points at the start of trading to 4.57 per cent. This marked the biggest jump since July, when jitters raced across bond markets after Rachel Reeves was seen teary in the House of Commons.
Whilst businesses were given some tax clarity after Reeves delivered her second Budget on 26 November, the UK was also dealt a major blow from the fiscal watchdog which downgraded growth forecasts every year from 2026 til 2030.
It came after the Office for Budget Responsibility (OBR) found the measures proposed in the Budget would do little to drive growth.
The watchdog also said the Chancellor’s move to raise taxes to the tune of £26bn – across landlords, the wealthy, bookies and pensioners – could trigger unforeseen consequences for the economy.
The OBR said levies such as capital gains taxes would be more intricate to measure the cost of as they were “highly sensitive” to behaviour and volatile asset prices.
It also warned that it may struggle to measure how raising taxes across the board could hit the UK economy while the forecast for the total tax take came with “significant uncertainty”.