UK economy ‘at risk of stagflation’ as growth stalls under Labour
Latest official GDP figures show the UK economy has stopped expanding since Labour took power, creating a headache for Keir Starmer after putting growth at the centre of his government’s mission.
The economy unexpectedly shrank by 0.1 per cent in October, according to new data from the Office for National Statistics. It missed economists’ expectations of 0.1 per cent growth, causing the pound to slip against the dollar.
A sharp fall in production output helped drive the contraction, as well as uncertainty hitting the services sector ahead of the Budget.
“There is a risk that the UK is slipping back into stagflation territory,” said Thomas Pugh, an economist at consultancy RSM.
“However, it’s likely that at least some of the weakness in October was driven by a pre-Budget ‘wait and see’ attitude by consumers and businesses and we still expect the economy to reaccelerate into 2025.”
It marks the first consecutive two months of contraction since the onset of the Covid-19 pandemic, with GDP also falling 0.1 per cent in September.
The UK economy outpaced all of its G7 rivals with 1.2 per cent growth in the first half of this year, but it has stopped expanding since Starmer won the general election on a pledge to boost growth.
“Growth was highlighted during the election campaign as being the prize, the magic that makes us all wealthier,” said Danni Hewson, head of financial analysis at AJ Bell. “But the formula for that magic has proved elusive.”
GDP has contracted 0.1 per cent since Starmer took office. It stagnated in July and rose 0.2 per cent in August.
Chancellor Rachel Reeves said: “The numbers on today’s GDP are disappointing, but it’s not possible to turn around more than a decade of poor economic growth and stagnant living standards in just a few months.”
The performance adds to a difficult situation for Labour as economists make gloomy forecasts on the fallout of its maiden Budget, which raised taxes by £41bn per year.
Businesses have warned higher labour costs from the tax measures will force them to raise prices and cut jobs. A closely-watched survey published on Friday suggested consumer confidence remained suppressed in December.
Bank of England policymakers are expected to make slower cuts to interest rates in the months ahead than other Western central banks as the jobs market cools and energy costs rise.
Across the pond, Donald Trump’s return to the White House risks Britain becoming embroiled in a trade war as the president-elect has committed to tariffs on EU and UK imports of 20 per cent.
“There is every chance that the economy went backwards in the fourth quarter as a whole,” said Paul Dales, chief UK economist Capital Economics. “It is unlikely that GDP will match the Bank of England’s 0.3 per cent fourth quarter forecast.”
Sanjay Raja, chief UK economist at Deutsche Bank, added: “The risk of a quarterly contraction is no longer negligible. Domestic uncertainties arising from the Budget have still yet to clear and external headwinds via the spectre of trade war adds to business uncertainty going into 2025.”