2024-11-15 09:17:00
Bank of England in the City of London on 6th November 2024 in London, United Kingdom. The City of London is a city, ceremonial county and local government district that contains the primary central business district CBD of London. The City of London is widely referred to simply as the City is also colloquially known as the Square Mile. (photo by Mike Kemp/In Pictures via Getty Images)
Mike Kemp | In Pictures | Getty Images
The U.K. economy showed a surprise contraction in September and only marginal growth in the third quarter following a strong rebound at the start of the year, initial figures showed Friday.
Gross domestic product fell by 0.1% in September, following growth of just 0.2% the previous month, according to the Office for National Statistics. Economists polled by Reuters had expected growth of 0.2% for September.
For the third quarter as a whole, the British economy grew just 0.1% compared to the previous quarter. That’s below the 0.2% growth expected by economists and follows an expansion of 0.5% in the second quarter of the year.
U.K.’s dominant services sector also grew just 0.1% on the quarter, the Office for National Statistics said. Construction rose by 0.8%, while production slipped 0.2% in the month.
It comes after inflation in the U.K. fell sharply to 1.7% in September, dipping below the Bank of England’s 2% target for the first time since April 2021. The fall in inflation helped pave the way for the central bank to cut rates by 25 basis points on Nov. 7, bringing its key rate to 4.75%.
The Bank of England said last week it expects the Labour Government’s tax-raising budget to boost GDP by 0.75 percentage points in a year’s time. Policymakers also noted that the government’s fiscal plan had led to an increase in their inflation forecasts.
U.K. Finance Minister Rachel Reeves said Friday she was “not satisfied” with the numbers.
“At my Budget, I took the difficult choices to fix the foundations and stabilise our public finances. Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal,” she said in a release.
Analysts flagged underlying weakness in the economy and growing risks from geopolitical tensions as potential barriers to further growth.
“It’s clear that the economy has a bit less momentum than we previously thought. And it’s striking that the economy has only grown in two of the past six months,” said Ruth Gregory, deputy chief U.K. economist at Capital Economics.
“Overall, despite the contraction in September, we still expect GDP growth to pick up in the coming quarters as the government’s debt-financed spending boosts activity and as the drags from higher inflation and higher interest rates continue to fade,” Gregory added.
A rate cut at the BOE’s next meeting in December now looks “improbable,” according to Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales. He said inflation risks and growing global headwinds will likely prevent policymakers from pursuing back-to-back rate cuts.
“These figures suggest that the economy went off the boil even before the budget, as weaker business and consumer confidence helped weaken output across the third quarter, particularly in September,” Thiru said in emailed comments.
The outcome of the recent U.S. election has fostered much uncertainty about the global economic impact of another term from President-elect Donald Trump. While Trump’s proposed tariffs are expected to be widely inflationary and hit the European economy hard, some analysts have said such measures could provide opportunities for the British economy.
Bank of England Governor Andrew Bailey gave little away last week on the bank’s views of Trump’s tariff agenda, but he did reference risks around global fragmentation.
“Let’s wait and see where things get to. I’m not going to prejudge what might happen, what might not happen,” he told reporters during a press briefing.
The British pound was broadly flat against the U.S. dollar by mid-morning in London. The euro strengthened 0.4% against the pound following Friday’s GDP release.
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**Interview with Ruth Gregory, Deputy Chief U.K. Economist at Capital Economics**
**Editor:** Thank you for joining us today, Ruth. The U.K. economy showed a surprising contraction in September and only marginal growth in the third quarter. What do you think are the primary factors behind this slowdown?
**Ruth Gregory:** Thank you for having me. The contraction we’ve observed is attributed to a combination of factors. Notably, we saw GDP fall by 0.1% in September, contrasting sharply with the 0.2% growth anticipated by economists. The services sector—which is the dominant part of our economy—gained only 0.1% in the third quarter, which suggests underlying weakness. There are also external factors, such as geopolitical tensions, which add to the uncertainty and could further inhibit growth.
**Editor:** Interestingly, inflation dropped sharply to 1.7% in September, falling below the Bank of England’s 2% target for the first time since 2021. How does this low inflation affect the Bank’s monetary policy moving forward?
**Ruth Gregory:** The decline in inflation definitely plays a pivotal role in shaping the Bank of England’s strategies. With inflation falling, the central bank was able to reduce rates by 25 basis points on November 7, bringing the key rate to 4.75%. This change is aimed at stimulating the economy amid signs of weakness. However, given the economic indicators, a further rate cut in December now looks improbable, as the focus may shift towards monitoring the economic impacts of recent spending measures and the expected recovery from the government’s fiscal plans.
**Editor:** Speaking of government plans, the Labour Government’s tax-raising budget is projected to boost GDP in the coming year. How significant do you think this fiscal policy will be for economic recovery?
**Ruth Gregory:** It could be significant indeed. The Bank of England expects this fiscal policy to enhance GDP by up to 0.75 percentage points. This infusion of growth, if paired with sustained investments and reforms as Finance Minister Rachel Reeves indicated, may create more jobs and ultimately lead to an improvement in living standards. Nonetheless, caution is warranted. The metrics we’ve seen suggest that growth has been uneven, and we need to see consistent momentum in both the services sector and other areas.
**Editor:** You mentioned earlier that there’s a risk of less economic momentum than previously thought. How do you see the balance between risks and potential growth opportunities for the U.K. economy?
**Ruth Gregory:** It’s a delicate balance. While we anticipate some pick-up in GDP growth driven by government spending and decreasing inflationary pressures, persistent risks—like geopolitical tensions and potentially fluctuating consumer confidence—remain. The next few quarters will be critical. If the government’s plans translate into tangible economic activity, we could see a sustained recovery. However, if external pressures mount, we may find ourselves facing headwinds that could dampen this growth trajectory.
**Editor:** Thank you, Ruth, for your insights. It appears that while there are challenges ahead, there are also opportunities for recovery if the right policies are put into place.
**Ruth Gregory:** Absolutely, it’s a pivotal moment for the U.K., and careful navigation will be essential. Thank you for having me.
