UK Economy Contracts in October, Raising Recession Fears and Bank of England’s Dilemma

The Office for National Statistics cited exceptionally wet weather as a potential factor affecting the data.

Official data released on Wednesday revealed a concerning contraction in Britain’s economy during the month of October, with a 0.3% decline in Gross Domestic Product (GDP).

This unexpected dip has raised concerns about the possibility of a recession, placing the Bank of England in a challenging position as it grapples with high inflation rates and a 15-year high in interest rates.

The Office for National Statistics cited exceptionally wet weather as a potential factor affecting the data.

Economists, polled by Reuters, had anticipated no change in GDP for October. Notably, this marked the first month-on-month GDP contraction since July, causing the British pound to depreciate against both the U.S. dollar and the euro.

Investors reacted swiftly, increasing their bets on the Bank of England initiating interest rate cuts in June 2024.

Concurrently, yields on 10-year British government bonds reached their lowest point since May.

However, despite market speculation, the central bank is widely expected to maintain its Bank Rate at 5.25% in its upcoming decision.

The Bank’s primary concern remains tackling Britain’s persistently high inflation rate, which stood at 4.6% in October.

Paul Dales, Chief UK Economist at Capital Economics, suggested that the October data hinted at the possibility of a recession, but the Bank would likely resist immediate rate cuts.

Elizabeth Martins, an economist at HSBC, anticipated a 6-3 vote in favor of keeping rates unchanged at the Bank of England’s Monetary Policy Committee meeting.

However, the weak GDP figures, coupled with signs of slowing wage growth, could potentially sway some of the committee members who advocate for rate hikes.

In the three months leading up to October, GDP stagnated.

While the economy managed to avoid contraction in the July-to-September period, there remains a risk of a shallow recession in late 2023 or early 2024, following the Bank of England’s interest rate hikes.

The economy has shown limited growth throughout 2023, with economic output now back at January levels.

In October, the services sector shrank by 0.2%, while manufacturing and construction contracted by 1.1% and 0.5%, respectively.

Despite being 2.0% larger than its pre-pandemic size in early 2020, the economy still faces challenges in terms of improving living standards.

Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt have pledged to stimulate economic growth.

However, substantial recovery is not expected until after an election that Sunak is obligated to call before January 2025.

Suren Thiru, Economics Director at ICAEW, commented that October’s negative economic performance jeopardizes the Prime Minister’s goal of economic growth, with high inflation and borrowing costs likely to stifle economic activity in November and December.

Additional data showed that Britain’s goods trade deficit for October was larger than expected at £17 billion ($21.30 billion).

Exports to the European Union, which also faces the risk of recession, saw a significant decline.

Adjusted for inflation, goods exports to the EU declined for the third consecutive month, reaching their lowest level since mid-2009, excluding the large fluctuations during the COVID-19 pandemic.