UK Economy Unexpectedly Contracts Ahead of Budget Announcement

The U.K. economy unexpectedly contracted 0.1% in the three months to October, according to official figures released on Friday. Economists had anticipated 0% growth for the period, following a 0.1% expansion in the three months to September.

The Office for Statistics reported that services output stalled, construction output fell 0.3%, and production output decreased by 0.5%, primarily due to a decline in the manufacture of motor vehicles, trailers, and semi-trailers.

These figures were released after Chancellor Rachel Reeves announced tax hikes in her recent Budget aimed at addressing a 'black hole' in the country's finances and promoting economic growth. Lindsay James, an investment strategist at Quilter wealth management, highlighted that October's GDP reveals significant challenges facing the U.K. economy, noting that the figure falls short of already low expectations.

Looking ahead to the Bank of England's rate decision next week, James suggested that the contraction increases the likelihood of a quarter-point rate cut to 3.75%. KPMG UK’s chief economist, Yael Selfin, predicted weak growth for the remainder of the quarter, attributing it to ongoing Budget uncertainty, and expected flat GDP growth for the final quarter of the year.