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In October, the UK economy experienced a slight contraction of 0.1 percent, a downturn attributed by both analysts and the UK statistics agency to the anxiety surrounding Rachel Reeves’ tax-raising Budget. This unexpected dip contrasts with the 0.1 percent growth that economists, surveyed by Reuters, had anticipated, highlighting the formidable obstacles confronting the Labour government.

These figures, unveiled on Friday, come as a blow to Reeves, who has been under intense scrutiny from MPs due to ongoing leaks and speculation that undermined confidence leading up to her Budget announcement on November 26. The contraction represents a setback for the government, as it attempts to navigate through these economic challenges.

Expressing concern, Sir Mel Stride, the Conservative shadow chancellor, labeled the decline in output as “extremely concerning” and attributed it directly to what he termed Labour’s “economic mismanagement.” This criticism underscores the political tensions surrounding the current economic climate.

Despite the government’s emphasis on prioritizing growth, the UK economy has shown expansion in only one out of the past seven months. Consequently, the economic output remains stagnant, matching the level it was at in May, which further complicates the government’s efforts to revitalize the economy.

Although the government says growth is its priority, the UK economy has expanded in only one of the past seven months and is now no bigger than in May.

The Office for National Statistics, which issued the October figures, said that “businesses across the production, construction and services sectors” — ranging from computer programmers to real estate firms and employment agencies — had spent the month waiting for the outcome of the Budget.

Lindsay James, investment strategist at Quilter, added that “much” of the fall in output shown in Friday’s figures “can be put down to the Budget and the deterioration in consumer confidence, spending and business planning”.

Reeves, who said this week that she did not authorise pre-Budget leaks, ultimately announced £26bn in tax rises. The overall tax burden is now expected to reach a record 38 per cent of GDP by the end of the parliament in 2029.

James said Friday’s GDP figures made a Bank of England interest rate cut next week “increasingly likely . . . but with inflation remaining persistently high, the pace at which subsequent cuts can be delivered remains questionable”.

The ONS also confirmed a 0.1 per cent GDP fall in September, when a cyber attack triggered a shutdown at Jaguar Land Rover, and said there had been no growth in August. 

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said that the “dismal” October GDP figures could be followed by a “similarly turbulent November”.

He said “the damage to business and consumer confidence from the frenzied speculation ahead of the Budget [was] likely to have frozen wider economic activity”. The after-effects from the Budget “may mean that the UK’s economic prospects are poorer over the near term”, he added.

For the overall August to October period, the economy also fell 0.1 per cent compared with the previous three months, the ONS data showed, the first such fall since the end of 2023.

Liz McKeown, ONS director of economic statistics, said that during the three-month period, “production fell again and services growth stalled . . . continuing the recent trend of slowing in this sector”.

She noted that growth in rental, leasing and retail was offset by falls in the wholesale and scientific research sectors and that during October the car industry only made a “slight recovery”. Construction also shrank in the three months to October.

Growth has slowed steadily through the year, down from 0.7 per cent in the first quarter and 0.3 per cent in the second.

Even before Friday’s figures were released, markets attributed a high likelihood to a quarter-point interest rate cut to 3.75 per cent by the BoE next week, partly because of the country’s sluggish growth. Traders stuck to those bets after the data was published, giving a cut a 90 per cent probability.

The pound slipped 0.1 per cent against the dollar to $1.337 on Friday morning. Gilt yields were little changed.

Philip Shaw, an economist at Investec, said it was “not totally clear” whether the recent weakness of the economy marked a fundamental downturn or just reflected a pre-Budget dip in spending.

But, he added: “Without a material upturn in momentum towards the end of the year, the economy will post a quarterly contraction in Q4 for the first time in two years.”

The Office for Budget Responsibility upgraded its UK growth forecast for 2025 to 1.5 per cent last month, compared with the 1 per cent it had expected in March. 

The change was partly because of first-quarter growth that itself had been spurred by business activity ahead of US President Donald Trump’s tariffs and house purchases made before increases in stamp duty took effect.

However, the fiscal watchdog revised its 2026 growth expectations down 0.5 percentage points to 1.4 per cent.

The OBR expects quarterly growth to pick up “only gradually” in the near term because of continuing geopolitical uncertainty and subdued business and consumer confidence.

A Treasury spokesperson said the government was “determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services”, pointing to action to cut energy bills, reform the planning system and expand major airports.

The OECD forecast this month that the UK economy would grow by 1.4 per cent this year, the second-fastest pace in the G7 countries after the US. But it also said growth would slow to 1.2 per cent next year, below the rates of Canada and the US.