On an annual basis, the economy expanded by 1.1%, unchanged from September but well below the 1.4% increase economists had forecast. Taken together, the data point to an economy that is no longer just stagnating but edging into a shallow downturn.
The weakness was echoed in rolling three-month figures, which showed output falling by 0.1% between August and October. That contraction came as a surprise to markets, which had been expecting flat growth. Sterling slipped in response, dipping to around $1.338 and weakening against the euro, although the pound remains on course for a weekly gain amid broader US dollar softness.
A fragile growth picture
October's decline marks the fourth consecutive monthly fall in GDP, leaving output around 0.4% lower than in June. While the scale of the contraction is modest, the persistence is problematic. It suggests that the post-pandemic recovery has lost traction at a time when households and businesses are grappling with higher borrowing costs, weaker confidence and slowing income growth.
The details of the data show that the slowdown is broad-based. Manufacturing provided a rare bright spot, boosted by a recovery in car production after a major manufacturer restarted operations following a cyber-attack. That rebound added an estimated 0.14 percentage points to monthly GDP.
But those gains were more than offset elsewhere. Services, which make up the bulk of the UK economy, subtracted around 0.23 percentage points from growth, with wholesale and retail activity particularly weak. Construction output also fell, shaving a further 0.04 percentage points from GDP. The result was a net contraction despite the manufacturing lift.
Beyond budget jitters
Some analysts had initially pointed to political uncertainty ahead of the late-November Budget as a drag on confidence. However, economists at Berenberg argue that deeper forces are at work. According to their analysis, the economy has "faltered more dramatically than expected," and the cumulative decline in output since early summer reflects deteriorating fundamentals rather than a temporary confidence shock.
Berenberg highlights a sharp deceleration in household real income growth as a key factor. Employment has been trending lower, pay growth has slowed markedly, and inflation, while easing, remains high enough to erode purchasing power. In that context, consumer-facing sectors such as retail have struggled, weighing heavily on overall activity. The bank also notes that more recent survey data suggest the malaise has continued beyond October, making a near-term recovery unlikely.
The renewed weakness comes just days before the Bank of England's next policy meeting. Markets are already pricing in a high probability of a rate cut, reflecting growing confidence that inflation pressures will continue to ease as demand softens.
Here again, Berenberg sees the slowdown as a double-edged sword. While the loss of momentum is painful in the short term, the bank argues that it will help bring inflation down more swiftly in 2026. On that basis, Berenberg expects the Bank of England to cut its policy rate from 4.0% today to around 3.0% by mid-2026, with the first reduction potentially coming as early as December.
For policymakers, the latest GDP figures reinforce the delicate balancing act ahead. Cutting rates too slowly risks deepening the downturn, while moving too quickly could reignite inflation if price pressures prove stickier than expected. While the October contraction does not yet signal a deep recession, it does mark a clear loss of momentum in an economy that has struggled to generate sustained growth since the pandemic.
