The UK economy has shrunk again – but it’s too soon for Reeves to utter the ‘R’ word

Instead of growing by 0.2 per cent, as optimistically forecast by the City and the Bank of England, the UK economy shrunk by 0.1 per cent in October for the second month running.

Manufacturing was hit the hardest, with a 0.6 per cent contraction recorded, but construction also fell while the dominant services sector flatlined.

The picture looks marginally better over the past three months; the economy expanded by 0.1 per cent over the longer period. And remember, you have to have two consecutive quarters in the red to qualify as a recession – we’re not there yet by any means.

But that’s of little consolation, particularly when compared to earlier in the year, when the picture was considerably brighter.

Some of this can clearly be put down to pre-Budget nerves. The natural response of businesses to the run of stories warning of a tax-raising event was to sit on their hands, holding back on decisions involving spending money until they could properly assess its impact. But that was factored into the expectations.

What ought to really worry chancellor Rachel Reeves is that this came before the impact of her decision to put the lion’s share of her cash grab on the shoulders of businesses via increased employer national insurance contributions (NICs) is felt. Many firms have said they will reduce hiring and maybe cut jobs to cope with the increased tax burden. They may also prune their investment plans – and the UK badly needs business investment to get out of its trough.

Reeves insisted that she had “put in place policies to deliver long-term growth”, while describing the figures as “disappointing”. The latter is an understatement.

Those policies include plans to ramp up public investment, which is where she is on the right track. But it will take time for the benefits of that to be realised, and some of them will be offset if business investment falls on its face.

In the shorter term, it is quite hard to see where growth is going to come from. Consumer confidence remains very low. The long-running index produced by GfK delivered a result of -17 for December, a small improvement over the prior month (-18) but that’s really not saying much. Business confidence surveys have scarcely been better.

Meanwhile, the government continues to slip on banana skins and cause problems for itself. An improved trading relationship with Europe is something that would surely help to shift the narrative. Businesses and an increasing number of voters are crying out for that. But Labour’s reductive approach has seen it loudly trumpeting its “red lines”. That this goes down extremely badly in Europe doesn’t appear to have registered.

Another unhelpful development came from government researchers who warned that claims of reduced electricity bills from Ed Miliband’s bold net zero push are questionable. Reform UK – which won a council by-election in the North West overnight on a massive swing – sees opposing it as a potential winner, particularly among wavering Labour supporters in the North.

If there is any consolation, it is the impact all this may have on the Bank of England’s thinking. The economy’s poor performance was not solely down to pre-Budget jitters. Capital Economics pointed out that UK plc has produced growth in just one of the last five months. Much of that can be laid at the door of the lingering impact of high interest rates. Monetary policy is still quite restrictive even after two quarter point cuts.

I don’t think this gloomy result will be enough to sway the hand of the rate-setting Monetary Policy Committee (MPC) next week, at least not in the absence of a big surprise on the downside when it comes to inflation (November’s figure is also due next week). The latter has started to tick up again.

But the European Central Bank has just cut its rates for the fourth time this year – to 3 per cent – while signalling that there is more to come. And Switzerland’s rate setters lopped 0.5 per cent from theirs, the biggest move in a decade.

Central banks have a tendency to move in packs. I just don’t think the Bank of England will do Reeves any favours by joining this one.

So Christmas looks set to be cancelled at No 11. But the New Year may bring happier times. The OECD is still pencilling in UK growth of 1.7 per cent in 2025, behind America but ahead of the Eurozone. Trouble is, economic forecasts can’t be relied upon, as UK plc’s poor October clearly demonstrates.