UK Economy Faces Challenges as GDP Declines for Second Consecutive Month

The United Kingdom's economy contracted for the second month in a row in October, marking the first consecutive decline in gross domestic product (GDP) since the onset of the COVID-19 pandemic. This back-to-back shrinkage, reported by the Office for National Statistics (ONS), signals persistent economic challenges reminiscent of the severe downturn experienced during the initial coronavirus lockdowns in March and April 2020.

Economic Performance in October

In October, the economy shrank by 0.1% month-on-month, mirroring a similar contraction in September. The stagnation of the services sector, coupled with declines in manufacturing and construction output, contributed to this lackluster performance. Separate trade data added to the gloomy outlook, revealing a decline in both imports and exports of goods.

The slowdown raises concerns about the economy's resilience amid ongoing global and domestic pressures. The UK's struggles to regain pre-pandemic momentum place it among the weakest performers in the group of major advanced economies, alongside Germany, which is also grappling with rising energy costs exacerbated by geopolitical tensions following Russia’s invasion of Ukraine.

Government and Policy Response

Finance Minister Rachel Reeves acknowledged the disappointing figures but maintained optimism about the government’s long-term economic strategies. The budget unveiled on October 30 featured a mix of significant tax hikes for businesses, aimed at increasing revenue, and expanded investment in public services. The impact of these measures on economic performance is expected to surface in the November GDP data.

“While short-term challenges persist, our fiscal plan is designed to secure sustainable growth over the long term,” Reeves said.

Sterling saw a modest dip against the US dollar following the release of the GDP data, reflecting market unease. Traders now anticipate approximately three quarter-point interest rate cuts by the Bank of England (BoE) by the end of 2025 to stimulate the economy.

Outlook for the Bank of England

Despite market expectations, the BoE is unlikely to lower interest rates at its upcoming meeting, according to Paul Dales, Chief UK Economist at Capital Economics. However, confidence in this stance has waned following the latest data. The central bank recently revised its 2024 annual growth forecast downward to 1%, from a previous estimate of 1.25%. Growth is projected to rebound to 1.5% in 2025, though risks remain.

“Rising budgetary pressures, coupled with a weakening export climate, create significant headwinds for maintaining growth momentum,” said Hailey Low, Associate Economist at the National Institute of Economic and Social Research (NIESR).

Global and Domestic Pressures

The UK continues to face a host of challenges, including subdued business confidence, rising global policy uncertainties, and the lingering effects of the pandemic. The economic slowdown has heightened concerns about the government’s ability to balance fiscal discipline with the need to support growth.

Among advanced economies, Britain’s recovery remains sluggish, underscoring the urgency for measures to address structural weaknesses and bolster economic resilience. As November’s data looms, all eyes will be on the effectiveness of recent fiscal interventions and their ability to reverse the declining trend.