British economic contraction worse than expected

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Output declines in all three major sectors were key contributors to a drop in GDP in October

The UK economy contracted by 0.3% in October, the first time since July that GDP had shrunk on a month-by-month basis, according to data released by the Office for National Statistics on Wednesday.

The drop comes after a gain of 0.2% in September. Services, industrial production, and construction all showed weaker-than-expected results. The three sectors, which combined had declined for the first time in five months, were the major trigger for the drop in GDP due to their size in the economy.

In particular, manufacturing and construction fell by 1.1% and 0.5% respectively in October, while the country’s dominant services sector shrank by 0.2%.

Consumer-facing services saw a decrease of 0.1%, leaving output in the sector 5% below pre-pandemic levels. The largest negative contributions came from other personal service activities, which declined by 2.3%.

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The data comes just ahead of the Bank of England’s final rate-setting meeting of the year. On Thursday, the regulator is expected to keep interest rates unchanged at a 15-year high of 5.25%.

The British pound dropped by around 0.3% against the US dollar to $1.25 on Wednesday following the release of the GDP figures, as traders ramped up bets that the central bank would be pushed into deeper rate cuts in 2024.

Over the past several years, British households and businesses have been under growing pressure due to the cost-of-living crisis, while the chances of a recession have been rising.

Wednesday’s numbers exposed the challenges London is currently facing in its efforts to boost the economy amid high interest rates and the pressure of inflation on households’ disposable incomes.

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