By Don Nico Forbes
The U.K. economy contracted for a second straight month in October, cementing expectations that the Bank of England will lower its key interest rate next week.
Economic activity dipped 0.1% on month in October, the Office for National Statistics said Friday, after a 0.1% fall in September. Economists polled by The Wall Street Journal expected a 0.1% increase.
The contraction in October makes a rate cut by the BOE at its next meeting on Thursday more likely, as concerns over growth mount. While a reduction was already anticipated prior to the data, a faltering economy makes further rate cuts more likely next year.
U.K. growth picked up at the start of the year, largely driven by a surge in exports as buyers sought to get ahead of an anticipated hike in U.S. tariffs. This was followed by a steep falloff in activity. The economy has failed to expand since June, with concerns rising that low growth might be becoming entrenched.
The U.K. now faces a 10% tariff on most goods exported to the U.S.--lower than its peers in the European Union, but still considerably larger than during the first quarter.
However, the decline in activity in October was driven by a weaker services sector, which comprises the lion's share of the British economy, including a 1.1% fall in retail trade. In October, consumer spending was hampered by uncertainty ahead of the U.K. budget and the possibility of higher income taxes.
Though fears of an immediate increase in income taxes failed to materialize, the budget did little to prompt confidence going forward.
"Despite the budget avoiding frontloaded tax hikes and borrowing costs set to fall over the coming year, its effects are likely to linger and household sentiment may not improve in the near term," Yael Selfin, chief economist at KPMG UK, said.
After the budget, the Office for Budget Responsibility raised its growth expectations for 2025, but lowered them for the next four years, citing lower productivity growth.
The economy contracted despite a rebound in manufacturing output in October, as carmaker Jaguar Land Rover resumed production after a cyberattack.
Write to Don Nico Forbes at don.forbes@wsj.com
(END) Dow Jones Newswires
December 12, 2025 02:57 ET (07:57 GMT)
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