The UK economy saw a surprise contraction in October, with monthly GDP falling by 0.3%. This is compared to a growth of 0.2% in September, and it’s worse than expectations of a 0.1% fall. Interest rate rises imposed by the Bank of England to combat inflation have squeezed household spending, while construction and tourism were hit by the severe weather introduced by storm Babet. Bad weather also contributed to widespread falls in manufacturing and construction during the same month. “Services were the biggest driver of the fall with drops in IT, legal firms and film production – which fell back after a couple of strong months”, said the Office for National Statistics’ Darren Morgan.
Analysts expect the contraction to increase pressure on the Bank of England to refrain from another interest rate hike at its upcoming meeting. The Bank, which confounded market predictions when it raised its interest rate to 0.5% from 0.25% in November, has indicated that it is considering further rises in 2018. Despite this, the uncertainty caused by Britain’s looming departure from the European Union, scheduled to take place in March 2019, may cause the Bank’s policymakers to push a rate rise back.
The dip follows a concerted period of better economic performance for the UK, with recent GDP growth estimates of 0.4% in Q3 putting the economy ahead of the EU and the US. However, the mixed results suggest that the country is still struggling to achieve more sustained growth and to regain the lost ground from the 2008 recession. This, in turn, could further dampen investment and lead to lower confidence among businesses and consumers alike.
Despite the current situation, most economists continue to forecast overall UK growth over 2017 and 2018. Oxford Economics, for example, forecasts 1.8% growth next year, while acknowledging that weak productivity and rising inflation represent significant challenges to the economy
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