UK economy shrinks in September as investment slows

If the labor market data released earlier this week wasn’t enough to convince that a rate cut is coming next month, the growth data surely will.

The latest figures released by the ONS show that the UK economy shrank 0.1% in September, with a downward revision to the previous month’s data to 0%. This has culminated in a preliminary Q3 reading of just 0.1%, the slowest rate of growth this year so far. Furthermore, both manufacturing and industrial production saw their worst month since 2023 in September, with both sectors coming in much softer than anticipated. The only bright spot in the data released this morning is the construction output, which has seen a positive growth trend in the last eleven months. Meanwhile, business investment was slightly less bad than feared, with preliminary figures showing a contraction of 0.3% in Q3, versus -0.7% expected.

The slowdown in growth raises questions about momentum: Is the economy stuck in a low-growth trap, and will it be able to recover without an aggressive easing policy? For the Bank of England, this opens the door for further easing in the near future, with markets currently pricing in an 80% chance of a 25bps cut next month. The next hurdle will be the inflation data to be released next week, followed closely by the UK budget at the end of the month. The latest monthly readings have shown a positive trend in CPI; however, the year-over-year data continues to show persistent price pressures, with the rate stuck at 3.8% for the past three months. This has been a key headwind for the Bank of England in its path to easing rates.

A key area of stubbornness has been the services sector, which is a key powerhouse of the UK economy. However, today’s growth data shows an unexpected drop in the Index of Services, highlighting a possible easing in the sector, which may translate into a softer CPI reading next week. If so, markets will likely tighten their belief that further easing is coming in December, likely weighing further on the pound but giving domestic equities a boost.

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