Market News

BY Eir Nolsoe

When Sir Keir Starmer and Rachel Reeves presented their pitch to voters ahead of the general election, they were clear about their ambitions.

Growth was mentioned 49 times in Labour’s manifesto. Among their five key missions, “kickstart economic growth” was number one.

It’s not exactly going swimmingly. The economy has either contracted or flatlined in nine of the 16 months Labour have been in power.

The latest figures for October, published on Friday morning, add to the gloom: the economy shrank by 0.1pc, after a similar fall in September and no growth in August.

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Economists and observers have blamed the endless leaks ahead of the Budget for the latest slump.

David Morrison, at financial services firm Trade Nation, said October’s figure was “yet another disappointing economic number for the UK, and one which now puts investors on recession watch”.

Independent economist Julian Jessop went further in his assessment, saying: “Recession is usually defined as two successive quarters of negative growth, and we’re not there yet. But in the real world, yes we’re in recession.”

How did it all go so wrong?

The latest figures from the Office for National Statistics tell a story of weakness in big parts of the economy.

The services sector, which spans anything from hairdressers to film studios to City law firms, shrank by 0.3pc in October.

Construction fell by 0.6pc, despite the Government’s ambition to “build, baby, build”.

Only production grew by 1.1pc, however, this came after a 2pc fall in September. Observers had hoped for a bigger bounce back after the cyber-attack on Jaguar Land Rover hit manufacturing hard the previous month.

“We and the consensus had expected a recovery in car production to raise overall output as a major manufacturer restarted production following a cyber-attack,” says Andrew Wishart at Berenberg.

This failed to materialise, and Wishart blames “deteriorating fundamentals”, meaning Britain’s lacklustre economic performance overall.

No one had expected that speculation ahead of the Budget about who would get hammered by tax rises would be great for the economy. Now, the scale of the damage is becoming clear.

There has not been good news in the GDP figures since June. It suggests the unusually long build-up to Reeves’ second Budget has made things worse for an already sluggish economy, leaving companies nervous about investing or hiring.

“The road to the new year will be bumpy,” says Sanjay Raja at Deutsche Bank. “Budget uncertainty combined with weak hiring and rising unemployment fear will likely see spending and investment more subdued to end the year.”

Raja said there was a “meaningful risk” that the economy could shrink across the final three months of the year.

This sentiment is shared by Scott Gardner at J.P. Morgan Personal Investing.

He notes: “Economic growth has been inconsistent this year with the UK economy struggling to sustain momentum after a period of impressive growth in the first quarter.

“With growth now firmly in the slow lane, there is a clear feeling that the economy this year has taken two steps forward and one step back.”

In other words, the recession indicators are starting to flash red.

Unemployment is already rising and experts have for some time been describing the prolonged downturn in vacancies as a “hiring recession”.

“The labour market is clearly softening with payrolls showing a rise in jobless numbers. While wage growth remains resilient, unemployment is an area to watch as we head into 2026,” says Gardner.

The weakening job market will likely weigh on consumer confidence, with people more likely to put money into savings than spend when they feel worried.

This risks fuelling an already unhelpful pattern: families are sitting on large savings pots that could help get the economy out of its mess if they spent some of them, but they don’t feel confident enough.

Andrew Bailey, the Bank of England Governor, on Thursday told the Covid Inquiry that nervousness was still holding Britain back five years on from the pandemic.

“We have to this day a much higher saving rate in the economy than we had pre-Covid. The saving rate in the UK economy to this day is about double what it was pre-Covid. And of course, that’s another way of saying that household consumption is low,” Bailey said.

“Pre-Covid, there was quite a lot of focus on how low the saving rate was. I think you can see from that that there has been quite a marked change in behaviour,” the governor added.

Meanwhile, businesses are still grappling with big cost increases from Reeves’ maiden Budget, which saw a £26bn tax rise and a jump in minimum wage.

Increases to business rates for many hospitality businesses in the Chancellor’s latest Budget have left many bosses furious.

“Firms are left waiting for an unlikely Christmas miracle on growth,” says Stuart Morrison, research manager at the British Chambers of Commerce.

Their best hope is that Bailey and his colleagues at the Bank of England look at rising unemployment and a deteriorating economy and conclude that interest rates must come down.

“This weakness in GDP, coming alongside the slowing labour market and the decline in inflation in October makes us more confident in our forecast that the Bank of England will cut interest rates by another 25 basis points to 3.75pc next Thursday,” says Ruth Gregory at Capital Economics.

But inflation is still almost double the Bank of England’s target at 3.6pc. If this figure proves stubbornly high, the rate-setters could still find it difficult to cut.

“We think it would probably take a poor set of CPI figures on Wednesday to prevent the committee from collectively bringing the Bank rate down for the sixth time in the current cycle,” says Philip Shaw at Investec.

If interest rates stay where they are, then recession fears will only grow.

At the Treasury, there was no word from the Chancellor herself on the latest disappointing GDP numbers.

Instead, an unnamed spokesman said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.”