(Bloomberg) -- Britain’s economy contracted for a second straight month in October as consumers braced for a painful budget, leaving the Labour government’s pledge to boost growth in trouble only months after taking power.
Gross domestic product slipped 0.1% following a 0.1% contraction the previous month, the Office for National Statistics said Friday. Forecasters, who had expected a 0.1% gain, said the economy is now in danger of shrinking in the fourth quarter.
It extends a disappointing run of growth figures under Prime Minister Keir Starmer and means the economy has only grown in one of the four months since Labour took power.
There were also worrying signs of inflation concerns returning after Labour’s expansionary budget. A Bank of England survey published Friday found that consumers expect prices in the shops to rise 3% over the next 12 months, the first pickup in expectations over a year.
The economy’s momentum has slowed sharply since Starmer took office after outpacing all of its Group of Seven peers in the first half with a 1.2% surge. It compounds a shaky start since Labour swept to victory in the July 4 election with GDP overall shrinking 0.1% so far under its watch.
Sterling weakened following the release and was down 0.2% at $1.2645 early afternoon in London. Traders marginally added to bets on interest-rate cuts from the Bank of England next year.
The ONS said services flatlined for a second month in October because of weakness in consumer-facing sectors, including in pubs, restaurants and retailers. Manufacturing and construction output declined.
“There is every chance that the economy went backwards in the fourth quarter as a whole,” said Capital Economics Chief UK economist Paul Dales. “It is unlikely that GDP will match the Bank of England’s 0.3% fourth quarter forecast.”
Labour has promised to improve living standards and boost growth to the highest in the G-7 on a sustained basis — a pledge economists see as ambitious.
However, the new administration faces an uphill battle, with the jobs market cooling, mortgage and energy costs rising, and businesses threatening to pass on a huge payroll-tax increase by raising prices for consumers and cutting jobs. A separate survey Friday showed consumer confidence remained subdued in December.
Moreover, headwinds from abroad may build next year if a full-blow trade war triggered by Donald Trump returning to the White House weakens the global economy.
A big drag on the economy was consumer-facing services where output tumbled 0.6%, including a 2% decline in pubs and restaurants. It suggests that households tightened their belts, possibly fearing a squeeze from the budget. They were later largely spared most of the £40 billion ($50.6 billion) of tax hikes with businesses shouldering the burden.
In a statement, Chancellor of the Exchequer Rachel Reeves acknowledged the figures were disappointing and said the government “is determined to deliver economic growth as higher growth means increased living standards for everyone”
“There’s probably more bad news on the horizon,” Deutsche Bank Chief UK economist Sanjay Raja said. “Survey data paint a more pessimistic picture for the fourth quarter than the Office for Budget Responsibility’s and BOE’s growth models suggest. Budget uncertainty has hit demand and sentiment.”
The weak growth figures are unlikely to force a late policy pivot from the Bank of England, which is widely expected to keep interest rates on hold at next week’s meeting.
While the Monetary Policy Committee has emphasized the need for a “gradual” lowering in rates, a deteriorating economy may force it to act more aggressively next year. The BOE had expected a 0.3% gain in the fourth quarter.
“If downside surprises persist, it would open the door to a swifter easing cycle next year,” said Bloomberg Economics economists Ana Andrade and Dan Hanson.
“We expect growth to pick up going into 2025 on the back of looser fiscal policy, but uncertainty around global trade policy and the impact of tax hikes on businesses pose downside risks to our view,” they said.
Forecasts from the Office for Budget Responsibility show the economy growing around 0.5% a quarter on average over the next two years, boosted by increased government spending. Any shortfall will make it harder for Reeves to meet her fiscal rules, adding pressure for more tax hikes that she has vowed to avoid.
(Adds reference to BOE inflation attitudes survey)
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