UK Economy Logs Unexpected Contraction

The UK economy unexpectedly contracted in October as higher interest rates took its toll on activity, adding to expectations that the Bank of England is close to interest rate cuts.

Gross domestic product shrank 0.3 percent in October, partially offsetting growth of 0.2 percent in September, the Office for National Statistics reported Wednesday.

The fall was the first in three months and confounded expectations for flat growth.

Data suggests that the economy may go nowhere again in the fourth quarter or perhaps is in the mildest of mild recessions, Capital Economics’ economist Paul Dales said.

“That may nudge the Bank of England a little closer to cutting interest rates, although when leaving rates at 5.25% tomorrow the Bank will probably push back against the idea of near-term rate cuts,” Dales added.

The BoE had kept its key interest rate unchanged at 5.25 percent at November and September meetings, snapping a streak of 14 consecutive rate hikes. The rate was lifted by a cumulative 515 basis points since December 2021.

The next monetary policy announcement is due on December 14. Policymakers are widely expected to hold the benchmark rate for the third straight time.

Data confirms the low-to-no growth cycle the UK economy is in, British Chambers of Commerce Head of Research, David Bharier said.

All three sectors of the economy contracted in October, the ONS reported. The dominant service sector shrank 0.2 percent driven by a fall in information and communication. This followed a 0.2 percent rise in September.

Due to the contraction in manufacturing, overall production was down 0.8 percent, following no growth in September. Manufacturing logged a marked decline of 1.1 percent after a 0.1 percent gain.

Likewise, the construction sector posted a fall of 0.5 percent after rising 0.4 percent in September.

On a yearly basis, GDP expanded 0.3 percent but much weaker than the 1.3 percent growth posted in September and economists’ forecast of 0.6 percent.

In three months to October, real GDP showed no growth from three months to July as the 0.1 percent rise in services output was offset by the 0.7 percent decrease in production output and the 0.3 percent drop in construction.

Another report from the ONS showed that the visible trade deficit widened to GBP 17.03 billion in October from GBP 14.29 billion a month ago. The expected shortfall was GBP 14.1 billion.

Exports of goods rebounded 2.0 percent from the last month. Likewise, imports grew 7.5 percent on robust growth in imports of machinery and transport equipments.

The total trade deficit including goods and services, widened to GBP 4.5 billion from GBP 1.57 billion a month ago.

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