The economy remained in reverse gear during October, according to official figures covering the month ahead of the government’s first budget.
The Office for National Statistics (ONS) said output fell 0.1% following the 0.1% decline recorded for the previous month.
It marked the first time since the COVID pandemic that the economy had shrunk for two consecutive months.
The figures showed zero growth in the powerhouse services sector, with manufacturing and construction declining at a pace of 0.6% and 0.4% respectively.
Economists had expected a positive headline figure.
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The data adds to the picture of a far more jittery economy during the second half of the year, in the wake of the general election.
Critics blame the government, accusing Sir Keir Starmer and his chancellor Rachel Reeves of a spectacular, early, own goal that spooked the public and businesses alike.
After three weeks in office, both warned of a “tough” budget to come on 30 October due to an inherited “£22bn black hole” in the public finances that a snap Treasury review had uncovered.
The allegation from the Conservatives was that the figure was a fantasy, cooked up to justify a Labour spending spree they had planned all along but kept secret during the election.
There has been strong evidence since July of a hit to sentiment as a result of the budget warning, in data covering things like consumer spending and wage awards.
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The economy is now 0.1% smaller than it was before Labour came to power.
It’s been almost six months but the new government is yet to deliver on its promise to turbocharge economic growth.
The chancellor will today urge the public to be patient with her. The message will be: It will take a lot longer than six months to revive an economy that has been stagnating for a decade.
How confident should we be in her plan? On the one hand, falling inflation and interest rates should provide a more fertile environment for consumer spending and business investment.
The government’s plan to increase public investment should also boost demand in the economy and, if successful, lead to longer term sustained growth.
Yet, there are a number of risks. A big increase in business taxes next year will weigh on employment and growth.
Pubs, restaurants and retailers are already stagnating and that was before they reacted to the budget, which at the end of the month slapped them with a big increase in employers’ national insurance contributions..
The latest figures show output in consumer-facing services fell by 0.6% in October 2024, following growth of 0.4% in September 2024. Manufacturing also shrank by 0.6% as, across the economy, businesses went in ‘wait and see’ mode ahead of the budget. The risk is they didn’t like what they saw in the budget.
Then there is Trump and the risk of tariffs. Britain could escape the worst of the cross hairs but we will have to wait and see. If things go against us, it’s very possible that the Bank of England could soon start worrying more about weak growth than inflation, possibly a prelude – as we’ve seen in Europe – to a faster pace of interest rate cuts.
The economy, which had been the fastest-growing in the G7 between January and June, grew by 0.1% during the third quarter of the year.
Economists had been expecting a similar performance in the final three months of 2024 following a budget that largely spared working people additional pain but put businesses and those of wealthier means on the hook for extra taxes.
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Business has since accused the chancellor of hurting the very working people she wants to protect as measures, such as higher employer National Insurance contributions, will only lead to weaker pay growth, fewer jobs and higher prices as additional costs are passed on.
Employers also argue that the extra tax burden, along with tougher employee rights legislation, will hurt investment at a time when Labour has prioritised growth in the economy.
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Ms Reeves said the figures were “disappointing”, but defended the budget.
She said: “We have put public finances back on a stable footing, capped the rate of corporation tax at the lowest level in the G7, established a £70bn National Wealth Fund to drive growth in our towns and cities, launched a 10-year infrastructure strategy and are creating pension mega funds to boost investment in British businesses, infrastructure and clean energy.”
The chancellor added: “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.”
Mel Stride, the shadow chancellor, said: “It is no wonder businesses are sounding the alarm.
“This fall in growth shows the stark impact of the chancellor’s decisions and continually talking down the economy.”
He went on to say that Labour was left “the fastest growing economy in the G7”, adding: “Because of their decisions, growth is now under serious pressure.
“The impact will be felt by families through higher taxes, fewer jobs, higher prices and higher interest rates.”
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The government has shifted the growth emphasis to the public sector through a jump in investment in services such as the NHS.
Ms Reeves is borrowing more to help fund that and insists the budget was a one-off to help fix pressing problems that were unfunded by her predecessor.
The Bank of England has said that the reaction of business to the budget tax hikes is its main area of concern when judging the prospects for inflation and economic growth.
Financial markets are expecting four interest rate cuts next year but no change when policymakers meet for the final time in 2024 next week.
Commenting on today’s figures Yael Selfin, chief economist at KPMG UK, said: “October activity was held back by uncertainty ahead of the budget, with consumer and business confidence near recent lows.
“The fourth quarter could see a weaker pace of growth, as businesses come to terms with the higher tax burden announced at the budget as well as rising geopolitical uncertainties.
“Nevertheless, we expect higher public spending to lift GDP growth next year, with lower interest rates providing some boost to private sector demand.”
