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UK GDP contracts in October as Bank to hold firm on rates

UK GDP contracts in October as Bank to hold firm on rates
Paloma Kubiak
Written By:
Paloma Kubiak

UK Gross Domestic Product (GDP) is estimated to have shrunk 0.3% in the month to October, with experts suggesting this adds weight to the Bank of England’s ‘hold position’.

Zero growth was recorded in the three months to October, compared with the quarter to July 2023, according to the Office for National Statistics (ONS).

Monthly GDP is estimated to have fallen 0.3% in October, following growth of 0.2% in September.

The ONS noted that service output fell 0.2% and was the main contributor to the fall in growth in GDP.

Production output fell 0.8%, driven by widespread declines in manufacturing, after showing no growth in September.

Meanwhile, the construction sector fell 0.5%, following growth of 0.4% in September.

Anecdotal evidence suggests the declines could have been impacted by the heavy rainfall and strong winds, after the unusually warm September.

Either way, a contracting economy indicates that “high borrowing costs are denting activity and the hangover from the cost-of-living crisis is still hitting household spending”, according to Alice Haine, personal finance analyst at Bestinvest.

Haine said: “The dismal data may reignite fears that the UK economy is heading into a recession as higher interest rates continue to weigh on demand. The Bank of England expects the economy to remain on the brink of recession in 2024, with four quarters of flatlining growth as the central bank keeps interest rates high for an extended period to tackle stubborn inflationary pressures.”

Bank of England base rate on ice

Haine added that the Bank of England’s Monetary Policy Committee is widely expected to hold interest rates at 5.25% when it meets tomorrow, “raising hopes that the base rate really has peaked”.

Paul Dales, chief UK economist at Capital Economics, said: “Our 2024 GDP growth forecast of +0.1% is weaker than the consensus of +0.5%. But lingering constraints on domestic supply may prevent wage growth and CPI services inflation from falling as fast as most expect, which is why we think the Bank won’t cut interest rates until late in 2024 rather than in mid-2024 as most expect. That said, yesterday’s release of the soft wages figures for October implied that domestic prices pressures could ease a bit quicker and rate cuts could come a little sooner. But don’t expect to hear anything about that from the Bank tomorrow.”

Danni Hewson, head of financial analysis at AJ Bell, said the “awful weather and the disruption caused by strikes won’t have helped”, but even with the continued squeeze on consumer spending, the contraction in economic growth recorded in October was “greater than had been expected”.

Hewson said: “All sectors of the economy were affected as the impact of two years of interest rate hikes work their way through the system. The big question is whether October is the harbinger of recession or a tipping point as wage growth finally surpasses inflation?

“No one expects the Bank of England to do anything other than hold firm on rates as it continues the fight to bring inflation back down to that elusive 2% target. But the economy is weakened, treading water until such a time as those rate hikes can start to be unravelled.

“Even if the UK does continue to dodge recession, real growth is likely to prove elusive for at least the next year.”