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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What are the main factors contributing to the recent contraction in the U.K. economy as discussed in the interview with Ruth Gregory?
**Interview with Ruth Gregory, Deputy Chief U.K. Economist at Capital Economics**
**Interviewer:** Thank you for joining us, Ruth. Recent reports indicate a surprise contraction in the U.K. economy for September. What do you believe led to this unexpected decline?
**Ruth Gregory:** Thank you for having me. The contraction of 0.1% in September was quite surprising, especially after just a 0.2% growth in August. One of the main factors contributing to this downturn appears to be the underlying weaknesses in our economy, coupled with increasing geopolitical tensions. It’s also worth noting that the services sector, which dominates our economy, only grew by 0.1%, indicating a lack of robust activity.
**Interviewer:** Given this context, how do you assess the overall growth for the third quarter?
**Ruth Gregory:** The third quarter’s growth of just 0.1% compared to the previous quarter is below what we expected. While it does follow a stronger rebound earlier in the year, it illustrates the economy’s recent stagnation—only growing in two of the last six months. However, I remain cautiously optimistic that we will see improvement in the upcoming quarters as the effects of the government’s fiscal measures start to take hold.
**Interviewer:** The Bank of England recently cut rates to 4.75%. How do you think this will impact the economy moving forward?
**Ruth Gregory:** The rate cut was part of a response to falling inflation, which has now dipped below the Bank’s target. This, in conjunction with the government’s commitments to boost investment, could indeed create a positive environment for growth. But, as we currently see a decline in production, the path to recovery may require time and consistent investment.
**Interviewer:** Finance Minister Rachel Reeves mentioned a tax-raising budget aimed at bolstering growth. How do you view the effectiveness of these fiscal policies?
**Ruth Gregory:** Minister Reeves is right in identifying the need for foundational stability in our public finances. The projected boost of 0.75 percentage points to GDP within a year, as stated by the Bank of England, indicates that the government’s approach may yield positive results, especially if managed effectively. Still, it’s critical to remain attentive to both domestic dynamics and external pressures that could jeopardize this growth strategy.
**Interviewer:** what should we be watching in the coming months?
**Ruth Gregory:** Investors and economists should keep an eye on inflation trends, the impacts of government spending, and how the services sector evolves. Additionally, geopolitical events will likely continue to play a significant role—these factors could either hinder progress or pave the way for recovery. So, I’d advise a close watch on the economic indicators as we move towards the end of the year.
**Interviewer:** Thank you, Ruth, for your insights. We appreciate your time.
**Ruth Gregory:** Thank you for having me; it’s always a pleasure to discuss these crucial economic developments.
