The UK economy went into reverse in October, official figures revealed this morning, fuelling fears of recession and stoking debate over the Bank of England’s interest rate moves.
Data published by the Office for National Statistics showed UK gross domestic product tumbled by 0.3% month-on-month in October, following a 0.2% rise in September.
The fall in GDP in October was broadly based.
Manufacturing output tumbled 1.1% month-on-month with drops recorded in 10 of the 13 sub-sectors, the seasonally adjusted figures from the ONS showed, while the overall production sector shrank by 0.8%. Services output fell by 0.2% between September and October, and the construction sector contracted by 0.5%.
The UK economy had stagnated over the third quarter as a whole.
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Thomas Pugh, economist at accountancy firm RSM UK, warned in the wake of the October GDP figures that the UK’s recession indicators were now “flashing red”. He flagged a “significant risk” of recession next year.
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Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, also warned the economy was “at risk of recession”.
He said: “These figures suggest that the economy was unravelling even before the full force of previous interest rate rises fed through to households and businesses.
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“October’s negative outturn puts the Prime Minister’s target to get the economy growing in jeopardy, with high inflation and borrowing costs likely to suppress economic activity in November and December.”
The Bank of England’s Monetary Policy Committee has raised UK base rates from a record low of 0.1% in December 2021 to 5.25%.
Mr Thiru said: “While the monetary tightening by the Bank of England made the Government's promise to halve inflation more attainable, the subsequent squeeze on customer demand and business activity has made their pledge to grow the economy more difficult.”
Noting this week’s MPC meeting, he added: “These negative GDP figures mean that interest rates will almost certainly remain on hold this week. With inflation trending downwards and the economy at risk of recession, the case for cutting interest rates is likely to grow.”
Mr Pugh said: ‘The 0.3% month-on-month contraction in GDP in October, coming on the back of flatlining growth in Q3, has our recession warning indicators flashing red. However, growth should pick up over the rest of the quarter as a sharp fall in inflation, strong wage growth and government transfers to low-income households all give consumer spending a boost. As a result, we expect Q4 to look more like a repeat of Q3 than the start of a recession.
‘In any case, the big picture is still one of a stagnating economy. We doubt growth will materially pick up until towards the end of next year, meaning that the spectre of recession will hang over the UK economy for a long time yet.”
Mr Pugh added: “We doubt that the weaker-than-expected economy will have much of an impact on the MPC decision [this week]. Even though a contracting economy lessens the need to hold interest rates higher for longer, it is still far too early for the MPC to be considering interest rate cuts.
“The contraction in October was broad-based. But output in the manufacturing sector was hit especially hard.”
Analysing the services sector outturn, Mr Pugh observed: “The biggest contributor was weaker output in the IT (information technology) sector as computer programming services eased. However, output in consumer-facing services fell by just 0.1%, suggesting that consumers still seem to be prioritising spending on experiences.”
He said of the outlook: “Overall, we still expect the economy to continue to stagnate for the next year but there is a significant risk of a recession in early 2024. If flatlining growth does turn into a recession, it would give the MPC room to cut rates considerably faster than we, or the market, currently expect.”
Danni Hewson, head of financial analysis at stockbroker AJ Bell, said: “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.
“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.”
She added: “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.
“Why build houses if people will struggle to afford mortgages? Why open seven days a week if you can only fill your restaurant at weekends? Why invest in a new production line if you won’t get enough customers to buy your product - at least at the price you want to sell it at?”
Ms Hewson observed that “some of the factors responsible for the dismal economic performance in October won’t be repeated”.
She said: “Screen writers and actors have ended their walkout, which means action can resume on sets that had been dark. Consultants have reached a deal with the government, which could mean an end to at least some of the disruption that’s crippled the NHS [in England]. And people are finally getting to a checkout and finding their weekly shop has only gone up by a few pennies, rather than the pounds they’ve come to expect.”
However, Ms Hewson added: “Even if the UK does continue to dodge recession, real growth is likely to prove elusive for at least the next year.”
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