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UK Economy Contracts for Second Consecutive Month, Shrinking 0.1% in October

As per a report from the Office for National Statistics, the UK economy contracted unexpectedly by 0.1% in October, which was the second month of a decline. The setback came after the economy contracted by 0.1% in September and resulted from a decline in the production output. Economists had forecasted a modest 0.1% increase for the month, making the unexpected downturn all the more significant. However, real GDP is estimated to have grown by 0.1% over the three months leading up to October, compared to the previous quarter ending in July. 

The poor economic performance had seen the British pound devalue by 0.3% against the US dollar, trading at $1.2627 by 7:45 a.m. London time. UK Finance Minister Rachel Reeves acknowledged that the outcome was a disappointment but claimed that the government’s economic plans in the long run were appropriate. Reeves noted policies like corporation tax cap and a 10-year infrastructure plan as part of the measures taken by the government to spur growth. 

This month, the new administration unveiled its first budget, which included controversial proposals such as a £40 billion ($50.5 billion) tax increase. This involves increasing employer National Insurance, capital gains taxes, as well as the abolition of winter fuel payments for pensioners. Critics argue that the propositions will adversely affect job generation and business confidence. According to a report from the recruitment platform Indeed, National Insurance had already begun taking its toll on job openings in the UK. 

Despite the grim economic statistics, analysts believe that the Bank of England would not take drastic measures concerning its monetary policy. It had already cut interest rates by 0.25% in November to 4.75%. As inflation is still a concern, with the latest data showing it nudging closer to 3%, market watchers do not expect a rate cut in December. Thomas Pugh, an economist at RSM, UK, opined that although the economy could enter stagnation, the sudden reversal of monetary policy is unlikely. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said that a rate cut this month is unlikely and that policymakers will wait until February 2025 before easing again.