After UK economic growth went into reverse, economists now see a growing risk that the UK economy will post a flat or negative result for the fourth quarter, making the prospect of a Bank of England rate cut next week almost a total certainty.
UK gross domestic product fell 0.1% in October, the Office for National Statistics said, marking a second consecutive monthly contraction and extending the decline in output since June.
Separate ONS data showed the total trade deficit widened by £4 billion to £6.7 billion in the three months to October, with trade in services in surplus following a mild uptrend this year, while the trade in goods has seen a widening of the deficit in recent months.
The trade deficit widened to £4.8 billion in October alone, from £1.1 billion in September, worse than the consensus forecast of £1.2 billion. However, the underlying trade deficit, which excludes precious metals and erratics, moved into a surplus of £1.1 billion in October, a nine-month high, from a deficit of £4.7 billion.
Bumpy and dramatic road
Deutsche Bank's chief UK economist, Sanjay Raja, said the data showed “the road to the new year will be bumpy,” citing broad-based weakness in services, construction, and production, and warned of “some meaningful risk of a marginal quarterly contraction.”
He said he expects the Bank of England to deliver its final rate cut of the year next Thursday – or "have yourself a merry little rate cut", as he said, taking the base rate to a new cyclical low of 3.75%.
Berenberg economist Andrew Wishart said the economy had “faltered more dramatically than we expected,” noting weaker fundamentals and falling household income. Berenberg has cut its 2026 GDP forecast from 1.1% to 0.8%.
Julian Jessop, economics fellow at the Institute of Economic Affairs, said the data "confirms that Budget speculation has killed growth. Indeed, the latest business surveys suggest that November was even worse".
GDP was dragged down by the service sector, but, said Rob Wood at Pantheon Macroeconomics, "at least some of that drop looks like noise or a reaction to chaos running up to the Budget and so will likely reverse" in subsequent months.
He said consumer services dragged on October growth, "as pre-Budget tax hike speculation weighed on retail sales. But this was one of several areas where the fall in the month seems overdone".
However, Wood added that "the trouble is that Budget chaos through November could have hit growth too, so risks to our forecasts are to the downside".
Kathleen Brooks at XTB said it was important to read the GDP data alongside the trade data, which together "suggest that the UK economy buys more while it produces less. If the Labour government wants to boost growth it needs to break this pattern.
"Without a doubt, exceptionally high energy prices compared to our peers is hurting how much we can produce and manufacture in the UK. Without significantly changing how the UK charges for energy, the UK economy is doomed to a subdued economic performance for the long term."
Rob Morgan, chief investment analyst at Charles Stanley, said the Budget has provided "a bit more clarity" around the outlook, while also containing "one very important impact" in helping to further lower inflation, with measures to cut energy prices, cap fuel duty and freeze rail fares.
With inflation easing and economic momentum weakening, the Bank of England’s interest rate decision on 18 December was now "nailed on", said Suren Thiru, economics director at the ICAEW.
He said the likely deflationary impact of the Budget and downbeat GDP report is "likely to further fuel fears among rate-setters over the health of the UK economy".
The BoE cut should provide "some festive cheer" for the economy, said Morgan. "Even before today’s weak growth reading it was viewed as highly likely, but these frankly very poor numbers seal the deal."