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‘Stagnation nation’: UK economy shrinks unexpectedly in October

GDP weaker than forecast as output declines in all three main sectors

Shoppers in Slough in England, UK GDP fell 0.3 per cent between September and October, driven by declining services activity, as well as contracting manufacturing and construction output. Photograph: Hollie Adams/Bloomberg

Valentina Romei
Wed Dec 13 2023 - 10:41

The UK economy unexpectedly contracted in October, with all three main sectors reporting declines in output, according to figures that point to a weakening economy just ahead of the Bank of England’s final rate-setting meeting of the year.

Gross Domestic Product (GDP) fell 0.3 per cent between September and October, driven by declining services activity, as well as contracting manufacturing and construction output, according to data published by the Office for National Statistics on Wednesday.

Economists polled by Reuters had expected no change in GDP after a 0.2 per cent expansion the previous month.

While month-to-month fluctuations in GDP can be volatile, the readings add to signs that the UK economy has lost momentum in the closing months of the year. The figures came a day after official numbers pointed to a softening labour market with slower wage growth.

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On Thursday the Bank of England is expected to keep interest rates unchanged at a 15-year high of 5.25 per cent, but investors will be focused on the signals the bank offers on the inflation outlook next year.

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Sterling weakened 0.3 per cent against the dollar to $1.2519 on Wednesday after the GDP numbers as traders raised their bets that the central bank would be pushed into deeper rate cuts next year.

Gilts strengthened, with the yield on the benchmark 10-year UK government bond falling 0.05 percentage points to 3.9 per cent. Bond yields move inversely to prices. Markets are pricing in that the BoE will cut rates to 4.25 per cent or 4.5 per cent by the end of next year.

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Wednesday’s figures laid bare the challenge the UK government faces in trying to boost the economy amid high interest rates and the pressure of high inflation on household disposable incomes.

James Smith, research director at the think-tank Resolution Foundation, said the poor performance of the UK economy in October would reignite speculation about whether the country was back in recession as it raised the question of whether output would contract across the final quarter.

“But what’s not beyond doubt is that Britain is a stagnation nation,” he said, explaining that growth over the past 18 months was the weakest outside of a recession on record. – Copyright The Financial Times Limited 2023

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