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UK economic output unexpectedly shrank in September, dragging down third-quarter GDP growth and underscoring the fragile state of the economy ahead of Rachel Reeves’ tax-raising Budget this month.
GDP contracted by 0.1 per cent in September from the previous month, the Office for National Statistics said on Thursday, undershooting analyst predictions of zero per cent growth.
The slowdown, which reflected in part a production shutdown at Jaguar Land Rover triggered by a cyber attack, underscores the economic problems facing the Labour government as it seeks to bolster growth, which it says is a central mission.
“This latest slowdown shows the scale of the challenge facing the government as it seeks to kick-start growth,” said James Smith, Research Director at the Resolution Foundation think-tank.
“The next challenge will be to ensure that the upcoming Budget supports rather than hinders growth — no mean feat given the scale of fiscal consolidation that is expected.”
Business sentiment was hit by Reeves’ decision to increase payroll taxes by £25bn in her 2024 Budget, and households and companies are braced for further increases in taxation on November 26 as she looks to fill a fiscal gap of as much as £30bn.
The clampdown will affect an economy already showing signs of weakening, with unemployment at 5 per cent and businesses curtailing hiring.
GDP growth for the third quarter slowed to 0.1 per cent — also below expectations — from the 0.3 per cent expansion in the previous three months.
The third-quarter figure was the slowest growth rate since the end of 2023 and well below the 0.7 per cent growth recorded in the first quarter of this year.
Traders on Thursday cemented their bets on a quarter-point interest rate cut by the Bank of England at its December meeting, with swaps markets implying a roughly 80 per cent chance of a reduction.
That figure has jumped from about 60 per cent at the start of this week, although the biggest move was a result of unemployment figures published on Tuesday.
Rob Wood, an economist at Pantheon Macroeconomics, said the GDP release “all but seals a December rate cut when added to the weak jobs data published on Tuesday”.
Separate data published by the ONS on Thursday showed output per hour worked, a measure of labour productivity, grew at an annual rate of 1.1 per cent in the three months to September. This marked a rebound from a 0.5 per cent contraction in the previous quarter.
The statistics agency said output per hour worked was up 3.1 per cent from its pre-pandemic 2019 average when using its survey-based job
data, and 4.7 per cent when using alternative administrative job data.
In November, the Office for Budget Responsibility, the UK fiscal watchdog, is expected to downgrade its UK productivity outlook, creating a larger hole in the public finances.
The monthly GDP figures were sharply impacted by lower car production because of the JLR cyber attack. The ONS reported a 28.6 per cent decline in the manufacture of motor vehicles and related products.
The modest growth reported for the entire quarter was driven by increases of 0.2 per cent in services and 0.1 per cent in construction, while the production sector fell by 0.5 per cent.
The BoE had forecast 0.2 per cent growth for the quarter, as had analysts surveyed by Reuters, citing weaker exports to the US and the impact of the cyber attack.
Sanjay Raja, chief UK economist at Deutsche Bank, described Thursday’s figures as “disappointing”, adding that “while we always expected some course correction following the strong start to the year, today’s GDP release speaks of a slightly weaker economy”.
August’s monthly GDP figure was also revised down 0.1 percentage points to zero growth.
Responding to Thursday’s figures, Reeves said that “there is more to do to build an economy that works for working people”.
She added: “At my Budget later this month, I will take the fair decisions to build a strong economy that helps us to continue to cut waiting lists, cut the national debt and cut the cost of living.”
