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U.K. Economy Contracts More Than Expected in October

by Myfxtools
December 13, 2023
in News
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The U.K. economy experienced a slight contraction in October, surpassing economists’ predictions but not enough to trigger an immediate interest rate cut by the Bank of England.

According to preliminary data released on Wednesday by the Office for National Statistics (ONS), the country’s gross domestic product (GDP) fell by 0.3% compared to the previous month. Economists surveyed by The Wall Street Journal had anticipated a contraction of 0.1%.

This decline reverses the economy’s earlier better-than-expected performance, with September showing expansion following flat growth in August. However, October witnessed a downturn across various sectors, including a 0.8% slump in industrial output and a decrease in construction activity (partly attributed to adverse weather conditions). Services also contracted during this period.

The ONS’s statistics director, Darren Morgan, highlighted that over the past three months, growth has remained stagnant. He stated, “While services, particularly in engineering, film production, and education, demonstrated growth and recovered from the impact of summer strikes, manufacturing and house building experienced declines.”

Paul Dales, Chief U.K. Economist at Capital Economics, suggested that October’s contraction may indicate the possibility of a mild recession.

UK Economy Faces Challenges amid Higher Interest Rates

The impact of higher interest rates is outweighing the positive effects of rising real wages in the UK, according to economists. Inflation has been easing in recent months, giving households more spending power. However, the overall rate of price increases in October was still above the Bank of England’s 2% target at 4.6%.

The Bank of England’s monetary-policy committee is set to meet this week, with expectations that it will maintain its key bank rate at 5.25%. The central bank had previously signaled the end of its interest-rate increases, which were aimed at curbing inflation.

Economists predict that the UK economy will continue to face challenges well into next year. Factors such as constraints on domestic supply could prevent wage growth and services inflation from declining as quickly as anticipated. This is the main reason why economists believe that the Bank of England will not cut interest rates until late 2024, contrary to market expectations of a cut in mid-2024.

Money markets are currently indicating a possibility of the first interest rate cut by the Bank of England in June, but there is also a strong chance of a cut as early as May.

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Tags: Bank of EnglandeconomistsGDPInterest RatesU.K. economy
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