The economy remained in reverse gear in October, according to official figures covering the month before the government’s first budget.
The Office for National Statistics (ONS) said output fell 0.1% following the 0.1% fall recorded the previous month.
It was the first time since the COVID pandemic that the economy contracted for two consecutive months.
The figures show zero growth in the services sector, with manufacturing and construction falling at a rate of 0.6% and 0.4% respectively.
Economists had expected a positive overall figure.
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Data adds to picture of a much more nervous situation economy during the second half of the year, following the general elections.
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Critics are blaming the government, accusing Sir Keir Starmer and his chancellor Rachel Reeves of scoring a spectacular, early own goal that frightened the public and businesses.
After three weeks in power, both warned of a “difficult” situation budget on October 30 due to a “£22 billion black hole” in the public finances, revealed by a rapid Treasury review.
The Conservatives’ claim was that the figure was a fantasy, invented to justify a Labor spending spree that they had planned all along but kept secret during the election.
There has been strong evidence since July of an impact on confidence following the fiscal warning, in data covering things such as consumer spending and wage increases.
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The economy is now 0.1% smaller than it was before Labor came to power.
It’s been almost six months, but the new government has yet to deliver on its promise to boost economic growth.
The Chancellor is today calling on the population to be patient with him. The message will be this: it will take well over six months to revive an economy that has been stagnating for a decade.
How much confidence should we have in His plan? On the one hand, lower inflation and interest rates should create a more fertile environment for consumer spending and business investment.
The government’s plan to increase public investment is also expected to boost demand in the economy and, if successful, lead to sustained long-term growth.
However, there are a number of risks. A sharp increase in corporate taxes next year will weigh on jobs 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, hit them with a big increase in employers’ social security contributions.
The latest figures show that production in consumer services fell by 0.6% in October 2024, following growth of 0.4% in September 2024. The manufacturing sector also fell by 0.6%, as, Across the economy, businesses have gone into “wait and see” mode ahead of the budget. The risk is that 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 line of fire, but we will have to wait and see. If things turn against us, it is very possible that the Bank of England will soon start to worry more about weak growth than inflation, which could be a prelude – as we have seen in Europe – at a faster pace of falling interest rates.
The economy, which grew the fastest in the G7 between January and June, grew 0.1% in the third quarter of the year.
Economists had expected a similar performance in the final three months of 2024, following a budget that largely spared workers from further suffering but forced businesses and the richest people to pay additional taxes.
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Businesses have since accused the Chancellor of harming the workers she wants to protect, as measures, such as higher employer National Insurance contributions, will only lead to lower wage growth, fewer jobs and higher prices as additional costs are passed on.
Employers also say the extra tax burden, as well as tougher employee rights legislation, will hurt investment at a time when Labor is prioritizing growing the economy.
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Ms Reeves said the figures were “disappointing” but defended the budget.
She said: “We have put the public finances back on stable footing, capped the corporation tax rate at the lowest level in the G7, created a £70 billion National Wealth Fund to boost growth in our cities, launched a 10-year action plan. infrastructure strategy and create mega pension funds to boost investment in UK business, infrastructure and clean energy.
The Chancellor added: “We are committed to economic growth, because higher growth means higher living standards for everyone, everywhere. »
Mel Stride, the shadow chancellor, said: “It’s no wonder businesses are sounding the alarm.
“This fall in growth shows the brutal impact of the Chancellor’s decisions and his continued rhetoric on the economy.”
He went on to say that Labor had become “the fastest growing economy in the G7”, adding: “As a result of their decisions, growth is now under serious pressure.
“The impact will be felt on families through higher taxes, fewer jobs, higher prices and higher interest rates. »
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The government has shifted the focus on growth to the public sector by increasing investment in services such as the NHS.
Ms Reeves is borrowing more to fund this and insists the budget was one-off to help solve pressing problems that were not funded by her predecessor.
The Bank of England said businesses’ response to budget tax rises was its main concern when judging the outlook for inflation and economic growth.
Financial markets expect 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 dampened by uncertainty surrounding the Budget, with consumer and business confidence close to recent lows.
“The fourth quarter could see a slower pace of growth, as businesses cope with the increased tax burden announced in the budget as well as growing geopolitical uncertainties.
“Nevertheless, we expect increased government spending to boost GDP growth next year, while lower interest rates will somewhat boost private sector demand. »