UK economy unexpectedly contracted by 0.1% in September

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The UK’s economic output unexpectedly contracted in September, dragging down third-quarter GDP growth and highlighting the fragile state of the economy ahead of Rachel Reeves’ proposed tax hike budget this month.

The Office for National Statistics said on Thursday that gross domestic product contracted by 0.1 per cent in September compared to the previous month, falling short of analysts’ expectations of zero per cent growth.

The slowdown, partly reflected in the shutdown of production at Jaguar Land Rover due to a cyber attack, highlights the economic problems facing the Labor government as it seeks to boost growth, which it says is a central mission.

“This latest slowdown shows the scale of the challenge facing the government as it seeks to unlock growth,” said James Smith, research director at the Resolution Foundation think tank.

“The next challenge will be to ensure that the next budget supports growth rather than hinders it – no easy feat given the scale of fiscal consolidation expected.”

Business sentiment has been hit by Reeves’ decision to increase payroll taxes by £25bn in her 2024 Budget, and households and businesses are bracing for further tax rises on November 26 as they look to close a financial gap of up to £30bn.

The campaign will affect an economy that is already showing signs of weakness, with unemployment reaching 5 percent and companies cutting back on hiring.

Third-quarter GDP growth slowed to 0.1 percent – also below expectations – from the 0.3 percent expansion in the previous three months.

The third-quarter figure was the slowest growth rate since the end of 2023 and well below the 0.7 percent growth recorded in the first quarter of this year.

Traders have slightly increased their bets on the Bank of England cutting interest rates by a quarter of a percentage point at its December meeting, with swap markets now indicating an 83 per cent chance of a cut. That number jumped from about 60 percent at the beginning of this week, although the biggest move was a result of unemployment numbers published on Tuesday. The yield on two-year government bonds was steady at 3.74 percent.

Rob Wood, an economist at Pantheon Macroeconomics, said the GDP release “leads to a rate cut in December when added to the weak jobs data published on Tuesday.”

Monthly GDP numbers were sharply affected by a decline in car production due to the Jaguar Land Rover cyber attack. The Office for National Statistics reported a 28.6 per cent decline in the motor vehicle and related products industry.

The modest growth recorded for the entire quarter was driven by increases of 0.2 percent in services and 0.1 percent in construction, while the production sector declined by 0.5 percent.

The Bank of England had expected growth of 0.2 percent during the quarter, as expected by analysts polled by Reuters, pointing to weak exports to the United States and the impact of the cyber attack.

Sanjay Raja, chief UK economist at Deutsche Bank, called Thursday’s numbers “disappointing”, adding that “while we always expected some course correction after a strong start to the year, today’s GDP release speaks to a slightly weaker economy.”

The monthly GDP figure for August was also revised down 0.1 percentage point to zero growth.

Responding to Thursday’s figures, Reeves said “more needs to be done to build an economy that works for the working class.”

She added: “In my budget later this month, I will make fair decisions to build a strong economy that helps us continue to reduce waiting lists, reduce the national debt and lower the cost of living.”