Is Britain’s economy ‘going backwards’?

Has the UK economy come to a standstill? This morning we learn that the economy contracted by 0.3 per cent in October, far worse than the zero per cent change to GDP that was expected by economists. Furthermore, the Office for National Statistics (ONS) reveals there was no overall growth in the three months to October.

These figures are even more disappointing after the economy grew by 0.2 per cent in September, as they are the first indication that growth could flatline in the final quarter of the year. Health and social activities did increase – rising by 0.4 per cent, as there were fewer strikes in October than September and fewer appointments rescheduled –  but services output, production output and the construction sector all took a hit (contracting 0.2 per cent, 0.8 per cent and 0.5 per cent, respectively). The biggest fall came in the information and communication sector – a contraction of 1.7 per cent – with falls in output from ‘computer programming, consultancy and related activities, as well as motion picture, video and TV production.’

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The ONS points to ‘wet weather’ as ‘anecdotal evidence’ to explain October’s figures. But the main culprit is far more likely to be (relatively) high interest rates, which seemed to reach their peak in August and have been held at 5.25 per cent since. This is, of course, what higher rates are designed to do: take some heat out of the economy, to help get inflation back down to target. But it’s a delicate balance. Get rates right and price hikes will slow, get it wrong and you risk tipping the economy into recession. That rate hikes can take months to work their way into the system makes things even trickier: hikes are often not felt by businesses and consumers for some time. October’s slowdown is likely to reflect decisions made many months previously by the Bank of England, which means by the time evidence emerges that economic activity is being weighed down too heavily, it’s often too late.

Whispers of recession have started again this morning. Capital Economics says that October’s data could be the sign of ‘the mildest of mild recessions’ and could ‘nudge the Bank of England a little close to cutting interest rates,’ although the forecaster doesn’t think this will happen as quickly as tomorrow, when we get another bank rate update from the Monetary Policy Committee. 

What is far more clear, however, is that the UK economy isn’t picking up speed heading into the new year – a nod to the Office for Budget Responsibility’s downward revision to 2024 growth figures (which now estimate that the economy will only grow by 0.7 per cent). Labour are capitalising fast on this morning’s numbers, with shadow chancellor Rachel Reeves declaring the economy is ‘going backwards’ in the wake of the October data.

Of course very few definitive claims can be made on one set of monthly data, but the bigger trends are not looking good, not least because the economy only managed to just stay on the right side of recession this year. Furthermore, it remains difficult for Tory MPs to counter such claims from Labour when growth numbers remain so weak. Chancellor Jeremy Hunt is describing this morning’s news as a necessary condition of getting inflation under control: that it’s ‘inevitable GDP will be subdued’ in that battle to control price spirals. He’s got a point, but the fact that it’s taken the UK a longer time than its counterparts to get inflation under control has meant a prolonged period of stagnant growth – and it’s one that Britain doesn’t appear to be escaping from anytime soon.