UK economy unexpectedly declines as services sector stalls

The UK economy unexpectedly contracted in October, marking two months in a row of negative growth for the first time since the pandemic, new figures show.

Chancellor Rachel Reeves said the data was “disappointing” as she said the Government was hoping to grow the economy with families “feeling better off with more money in their pockets”.

The Office for National Statistics (ONS) said gross domestic product (GDP) contracted 0.1% in October.

The data showed a weak month for pubs and restaurants dragged on growth amid some uncertainty before the autumn Budget.

Most economists had been expecting GDP to rise by 0.1% during the month.

The latest figures from the ONS follow a 0.1% estimated fall in September – meaning it is the first time the economy has contracted for two consecutive months since March and April 2020, during the onset of the Covid-19 pandemic.

It marks a fractional shift in the outlook for the economy after it eked out 0.1% growth over the latest quarter, between July and September.

The ONS said the services sector, which accounts for the largest proportion of the country’s output and employment, recorded no growth in October after also stalling in September.

Arts and entertainment, hotels and food services, and wholesale were among the sub-sectors to slow in October, while transport and science and technology increased.

Chancellor Rachel Reeves said she hopes GDP will start to improve as the Government targets economic growth.

“The numbers on today’s GDP are disappointing, but it’s not possible to turn around more than a decade of poor economic growth and stagnant living standards in just a few months,” Ms Reeves said.

She said the Government was “getting on with the job of improving economic growth and driving up living standards”.

“Growth is the number one mission of this Government – economic growth that results in families feeling better off with more money in their pockets – and we’re driving that economic growth and we hope that those numbers will start to improve because of the policies that we’re pursuing in the months ahead.”

Liz McKeown, the ONS’s director of economic statistics, said: “The economy contracted slightly in October, with services showing no growth overall and production and construction both falling.

“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics, and legal firms.

“However, the economy still grew a little over the last three months as a whole.”

The ONS’s monthly business survey showed signs of a mixed response ahead of the autumn Budget announcement at the end of the month.

Some industries, like manufacturers, retailers and recruiters, said turnover was affected as they waited for the outcome of the tax-setting statement.

Others, like real estate and legal services, were more positive and increased activity in the run-up, according to the ONS.

Rob Wood, chief UK economist for Pantheon Macroeconomics, said: “Global tariff threats, uncertainty from the Budget, a weak month for consumer spending and volatile sectors dragged GDP into another month-to-month fall in October.

“We think much of the drop in GDP can, however, be put down to erratic sectors that should bounce back in November.”

Mr Wood said there was “no doubt” the UK Budget and tariff threats following Donald Trump’s US election win “hit business sentiment hard in October and November”.

But he said weak growth was partly driven by volatile sectors and also political uncertainty which is likely to fade, meaning the Bank of England is unlikely to stray from expectations to keep interest rates unchanged next week.

A downturn for the manufacturing sector was the biggest drag on overall production output in October, which contracted by 0.6%.

The construction industry also fell by 0.4% in October, following growth of 0.1% in September, driven by repair and maintenance activity.

Debapratim De, director of economic research at Deloitte, said: “Growth is expected to remain sluggish over the winter months, before the budgetary boost to public spending shows up in the GDP figures.

“Despite the downbeat assessment, a rate cut by the Bank of England seems unlikely this month as policymakers remain cautious about the inflationary impulse from the Budget and the wider geopolitical environment.”