Market News

BY  Pedro Goncalves · Finance Reporter, Yahoo Finance UK

The UK's economy contracted unexpectedly in October, as the autumn budget cast a shadow of uncertainty ahead of Rachel Reeves' statement on 26 November.

Office for National Statistics (ONS) data showed UK GDP slipping 0.1% month on month, confounding City forecasts of a 0.1% expansion. The decline followed a 0.1% fall in September and flat output in August, evidence of what economists describe as a protracted period of stagnation.

Services, which account for more than 80% of economic output, registered no growth in October. The latest reading also undershot polling of economists, who had pencilled in a 0.1% rise.

Liz McKeown, director of economic statistics at the ONS, said: “The economy contracted slightly in the latest three months as production fell again and services growth stalled.” She added: “Within production there was continued weakness in car manufacturing, with the industry only making a slight recovery in October from the substantial fall in output seen in the previous month.”

The figures come after a 0.1% decline in September, when a halt in Jaguar Land Rover production dealt a blow to the manufacturing sector.

An HM Treasury spokesperson 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.

“That is why the chancellor is taking £150 off energy bills, protecting record investment in our infrastructure, and we are backing major planning reforms, the expansion of Heathrow and Gatwick airports, and the construction of Sizewell C.”

Many businesses have recently indicated that activity in the economy slowed in the lead up to the budget, delivered on November 26, as speculation over possible tax measures grew.

In its GDP report, the ONS write: "Businesses across the production, construction and services sectors reported that they, or their customers, were waiting for the outcome of the autumn budget 2025 announcement on 26 November 2025.

"These comments came from a range of industries, but were mainly from manufacturers, construction companies, wholesalers, computer programmers, real estate firms and employment agencies."

The data showed the UK economy has not grown since June, with GDP either flat or falling in the past four months.

Neil Birrell, chief investment officer at Premier Miton Investors, said it is time for bosses to worry about recession. He explained: "The malaise that hung over the UK economy ahead of the budget is evidenced by October’s GDP numbers, when the economy shrank. This was an outcome that was much worse than expected, but probably shouldn’t be a surprise given what we are hearing and seeing now.

"The UK is not currently a place that consumers or businesses want to spend money. It’s tough to see how this will reverse any time soon. The one hope is that there will be an interest rate cut next week and more to follow. It’s time to worry about recession, not inflation."

Yael Selfin, chief economist at KPMG UK, warned that further headwinds loom. She said: “Despite the budget avoiding front loaded tax hikes and borrowing costs set to fall over the coming year, its effects are likely to linger and household sentiment may not improve in the near term.

“The impact of earlier price shocks combined with rising inflation expectations, has seen households become more cautious.

“The outlook for investment growth is more positive and is set to be driven by both private and public sector activity. Investment in data centres and energy infrastructure, particularly in renewables, could help foster growth over the coming year. While government infrastructure spending is set to ramp up. As a result, we expect investment to remain a key contributor to growth going into 2026.

The UK economy also shrank by 0.1% in the three months to October. The ONS said this is the first three monthly fall in real GDP since December 2023.

Fergus Jimenez-England, associate economist at the  National Institute of Economic and Social Research, said: “Today’s disappointing figures show that the economy has seen no growth since June. This is especially concerning given that October’s GDP was lifted by a one-off rebound in manufacturing activity following the JLR cyber attack.

"Contractions in both services and construction indicate broad-based weakness, potentially reflecting uncertainty in the run-up to the budget.

"Recent survey data points to continued sluggishness for the remainder of the quarter, though with the budget now behind us, there is scope for improvement in December.

"Looking ahead, the autumn budget’s doubling of fiscal headroom should help reduce uncertainty over the coming year. Whether that will translate into stronger economic activity remains to be seen.”

Rob Wood, chief UK economist at Pantheon Macroeconomics, said the recent “budget chaos” through November is likely to hit growth through that month too, which could see GDP contract by 0.1% in the final quarter of 2026.

He said: “Weak GDP adds to the reasons for the Monetary Policy Committee to cut interest rates next week. Rate setters would need a huge surprise in inflation and the labour market data published next week to stop a hike.”