UK economy shrinks for the second month in October

The UK economy shrank for the second month in a row in October as concerns about the Budget continued to weigh on confidence.

Official figures showed a 0.1% drop, despite expectations that the economy would return to growth after a fall in September.

The Office for National Statistics (ONS) said that activity had stalled or declined with pubs, restaurants and retail among sectors reporting “weak months”.

Chancellor Rachel Reeves said the figure was “disappointing”, but added: “We have put in place policies to deliver long-term economic growth.”

Shadow chancellor Mel Stride said: “This fall in growth shows the stark impact of the chancellor’s decisions and continually talking down the economy.”

KPMG’s chief economist Yael Selfin said that activity was “held back by uncertainty ahead of the Budget on 30 October” as businesses and consumers held back on spending.

But some industries, such as real estate, law firms and accountancy brought forward work before Reeves announced the Budget, the ONS said.

The economy has grown just once over the past five months, according to Capital Economics, and is 0.1% lower than before Labour won the election in July.

“That suggests it’s not just the Budget that is holding the economy back,” said Capital’s chief UK economist Paul Dales.

“Instead, the drag from higher interest rates may be lasting longer than we thought.”

The Bank of England has cut interest rates twice this year but, at 4.75%, they are still relatively high compared with recent years.

The Bank will meet next week for the last interest rate decision of 2024, though it is not widely expected to reduce borrowing costs again until next year.

Simon Wells, chief European economist at HSBC, cautioned about placing too much emphasis on the reading for October.

It is an initial estimate of economic growth by the ONS and could be subject to “heavy revision”, he told the BBC’s Today programme.

“So just because it is -0.1% today doesn’t mean it is going to be that when more data has come in in a few months’ time.”

Over the three months to October, the economy expanded by 0.1%.

The manufacturing industry recorded the sharpest drop in activity in October, down 0.6%, followed by construction which fell by 0.4%.

Meanwhile, the services sector, which makes up the bulk of the UK economy, stalled with zero growth.

Rick Gaglio, owner of menswear shop Twisted Fabric in Hitchin, Hertfordshire, said “people are still being cautious”, and added that prices are still comparatively high.

“That’s just down to inflation and customers are feeling those price increases,” he said.

Mr Gaglio also said that retail sales were slow during the summer months due to wetter than usual weather.

“It’s been tough,” he said. “2024 generally for small businesses has been very, very tough and we just want to hear more good news, not bad news.”