The UK economy experienced an unanticipated contraction in October, marking a significant setback for growth as key sectors struggled. Gross Domestic Product (GDP) is estimated to have fallen by 0.3 per cent in October 2023, following a modest growth of 0.2 per cent in September, according to figures released by the Office for National Statistics (ONS). This unexpected decline defied economists’ forecasts, who had predicted a 0.1 per cent expansion for the start of the fourth quarter.
The ONS further reported that the UK economy showed no growth on a three-month rolling measure up to October 2023, indicating a broader slowdown.
The construction industry emerged as the worst performer, with activity contracting by 0.5 per cent in October. This decline was primarily driven by reductions in private new housing and commercial new work, with anecdotal evidence suggesting that adverse weather conditions, including heavy rainfall and strong winds, contributed to delays. The UK’s dominant services sector, a primary engine of economic activity, also saw a contraction of 0.2 per cent in October.
In the production sector, which encompasses manufacturing, output fell by 0.8 per cent in October, with manufacturing alone decreasing by 1.1 per cent. This comes despite the resumption of operations at Jaguar Land Rover (JLR) during the month, following a significant cyberattack that had severely disrupted its production throughout much of September. The cyberattack on the automotive giant, which began in late August and saw operations restart in October, was estimated to have cost the UK economy approximately £1.9 billion, making it potentially the most financially damaging cyber incident in British history.
The economy has shown signs of losing momentum in the latter half of the year, influenced by mounting concerns over anticipated policy changes in the then-upcoming Autumn Statement, a softening labour market, and persistent inflationary pressures. While annual inflation rates, as measured by the Consumer Prices Index (CPI), eased to 3.9 per cent in November from 4.6 per cent in October, they remained elevated. The labour market experienced a slowing trend, with the unemployment rate rising to 4.2 per cent for the June to August 2023 period, and job vacancies decreasing for the fifteenth consecutive period between July and September 2023.
Ahead of the official data release, analysts at Deutsche Bank had already revised down their forecasts for fourth-quarter growth, cutting estimates from 0.2 per cent to 0.1 per cent. They attributed this adjustment to “lingering” concerns stemming from the Autumn Statement and subdued business investment levels. The ONS corroborated this sentiment, noting that businesses across various sectors, including manufacturers, construction firms, wholesalers, computer programmers, real estate agencies, and employment agencies, reported awaiting the outcome of the budget before making investment decisions.
The Autumn Statement, delivered by Chancellor of the Exchequer Jeremy Hunt on 22 November 2023, aimed to boost economic growth through measures such as cutting National Insurance contributions and making a business tax-break scheme permanent. However, a range of forecasters, including the British Chambers of Commerce (BCC), had warned that the budget’s impact on lifting growth in the subsequent two years would be limited.
Luke Bartholomew, Deputy Chief Economist at Aberdeen, commented on the GDP figures:
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“Monthly GDP is always very volatile so it’s important not to read too much into monthly fluctuations, but it’s certainly plausible that speculation in the lead-up to the budget is responsible for yet another weak GDP report. Either way, the economy is clearly struggling to find any momentum, amid a weak labour market and fiscal concerns. All of which reinforces the case for the Bank of England to cut interest rates next week, and we expect further cuts next year too, eventually taking interest rates back towards 3%.”
Scottish Friendly’s savings expert Kevin Brown also commented:
“After overall growth in the third quarter of this year – albeit it relatively weak at 0.1% – today’s GDP figures are a blow and suggest that higher taxes, a weakening jobs market and fragile business confidence are beginning to take their toll on the economy.
“Unfortunately, the outlook doesn’t look any more encouraging. More contemporary data sets, such as the latest PMI figures, show that private sector output was virtually flat in November, following a noticeable slowdown in the UK’s dominant services sector. That’s a concern and suggests a fairly disappointing and muted end to 2025 is in store.
“Barring a surprise uplift in inflation or wage growth, we believe it’s now almost certain that the Bank of England will cut rates by 25 basis points when its rate-setting committee meets later this month.
“That means savers should use the time they have to shop around for the best rates because they will soon disappear if the BoE does act. For those prepared to take a longer-term view, investing in the stock market remains the most reliable way to generate higher returns and outpace inflation.”
