The U.K. economy unexpectedly shrank in September, overall growth in the third quarter was only marginal compared with a strong rebound at the start of the year, according to preliminary data published Friday.
The Office for National Statistics said GDP shrank by 0.1% in September, compared with a rise of 0.2% in the previous month. Economists polled by Reuters had expected a 0.2% rise in September.
The British economy expanded 0.1% in the third quarter from the prior quarter, a slower pace than the 0.2% growth economists had forecast, and down from 0.5% in the second quarter.
The largest component of the U.K. economy, the services sector, also grew by a meager 0.1% during the quarter, according to the Office for National Statistics. In contrast, construction activity increased 0.8%, but production dropped 0.2% in the month.
This performance of the economy follows the sharp drop in inflation, which fell to 1.7% in September below the target of the Bank of England at 2% for the first time since April 2021. The drop has allowed the central bank to cut the interest rate by 25 basis points to 4.75% on Nov. 7.
The Bank of England said last week that it expects the Labour Government’s tax raising budget will boost GDP by 0.75 percentage points in a year. Policymakers also said the government’s fiscal policy has led to an upwards revision in their inflation estimates.
U.K. Finance Minister Rachel Reeves voiced frustration with the underlying economic numbers on Friday.
In setting the course at my Budget, I took the tough decisions to strengthen the foundations and stabilize our public finances. We are now committed to fostering growth through investment and reform, aiming at creating more jobs and increasing disposable income, restoring the NHS, rebuilding Britain, and securing our borders during this decade of national renewal,” she said in a statement to the press.
Vulnerability on the ground already and rising risks from geopolitics have been cited by analysts as factors standing in the way of further expansion.
There is no doubt that the economy has less steam than previously thought, said Ruth Gregory, deputy chief U.K. economist at Capital Economics, but what is more specific is that growth has only been captured in two of the last six months.
Even with the September contraction, we maintain our forecast of stronger economic growth for the succeeding quarters due to rising government debt financed spending that would stimulate activities, even as the adverse effects of inflation and interest rates will be moderated,” Gregory added.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales said a cut in December now looks “unlikely” as inflationary risks and growing global tensions probably make policymakers leery of cutting rates twice in a row.
These figures suggest that the economy was already starting to lose steam ahead of the budget, with weaker business and consumer confidence weighing on output throughout the third quarter, but most notably in September,” Thiru said in emailed comments.
The result of the U.S. election has put significant uncertainty into the global economic implications of another presidential term for Donald Trump. While his proposed tariffs are thought to be far reaching in their inflationary impact and negative for the European economy, some analysts believe they may bring some opportunities for the British economy.
Bank of England Governor Andrew Bailey was similarly neutral on the bank’s view of Trump’s tariff plans last week, though he did raise concerns about fragmentation.
“Let us see how it plays out. I am not going to speculate on what might or might not happen,” he said during a news conference with reporters.
By mid morning in London, the British pound was little changed against the U.S. dollar while the euro was up 0.4% against the pound after Friday’s GDP report.
