UK economy shrinks by 0.1%: experts comment

Daniela Hathorn, Senior Market Analyst, Capital.com

“The latest figures from the Office for National Statistics revealed that the UK economy continued to contract in October, with GDP falling by 0.1% for the month and over the three months to October, defying expectations for modest growth. Economists had forecast a 0.1% rise for October alone, so the contraction was a surprise and follows a similar downturn in September. The weakness was broad-based: services output stagnated while both construction and production disappointed, underlining ongoing soft patches across key sectors. Against a backdrop of subdued consumer spending and political uncertainty after the government’s fiscal budget, the data reinforces a picture of stalling economic activity rather than a smooth recovery.

“A second consecutive monthly contraction raises fresh concerns about the strength of the UK recovery, suggesting that underlying demand and business confidence remain weak. For markets and policymakers, such data typically heighten expectations for further Bank of England easing. Market data suggests that they are now more confidently pricing at least a 25-bp rate cut at the next BoE decision, with further easing more likely to come in 2026 given the downside risks to growth and rising unemployment trends flagged by other indicators. The key caveat will be inflation, as it remains stubbornly high even if it is returning to disinflation.

“In financial markets, the reaction has been cautious but dovish. The pound has weakened slightly against major currencies on the news, reflecting increased bets on easier policy ahead, while UK government bond yields have edged lower on safe-haven flows and rate-cut expectations. Equities have been mixed: domestically oriented sectors are under pressure on growth concerns, whereas global exporters are holding up better. Overall, today’s data are reinforcing a narrative of slow growth and policy accommodation but also underscore persistent structural challenges in the UK economy that could dampen sentiment if the slowdown proves more persistent than markets currently expect.”

Pre-Budget worries weigh heavily on growth, but lower interest rates offer rays of hope

Rob Morgan, Chief Investment Analyst at Charles Stanley

UK growth at the start of the fourth quarter took place amid the swirling uncertainty of the lead up to the Autumn Budget. As some had anticipated, it resulted in a weak outturn. There was a contraction of -0.1% month-on-month for October with companies and consumers largely locked into ‘wait and see’ mode.

Construction and manufacturing were notably weak with businesses experiencing not only significant uncertainty but day-to-day battles with higher employment, escalating energy costs, and waning consumer confidence.

With the Budget now out of the way there is now at least a bit more clarity around the outlook. Furthermore, while the fiscal event contained little in the way of measures to invigorate growth directly, it should at least have one very important impact – lowering inflation.

Cutting energy prices, capping fuel duty and freezing rail fares will have a downward effect on CPI. Alongside a pedestrian growth picture that poses little inflationary risk, this should mean a shot in the arm arrives in the form of lower interest rates from the Bank of England.

In the short term, some festive interest rate cheer looks firmly on the cards next week with the BoE poised to slice a further quarter point off base rate. Even before today’s weak growth reading it was viewed as highly likely, but these frankly very poor numbers seal the deal.

And as inflation subsides throughout next year there’s a strong chance of further cuts that take interest rates deeper into less restrictive territory. This should help prop up household confidence and the all-important property market. Crucially, it stands to stimulate some sorely needed investment activity too and keep the economic wheels grinding in the right direction for the time being.

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