UK economy surprises with September contraction, grows just 0.1% in the third quarter

The U.K. economy showed a surprise contraction in September and only marginal growth in the third quarter following a strong rebound at the start of the year, initial figures showed Friday.

Gross domestic product fell by 0.1% in September, following growth of just 0.2% the previous month, according to the Office for National Statistics. Economists polled by Reuters had expected growth of 0.2% for September.

For the third quarter as a whole, the British economy grew just 0.1% compared to the previous quarter. That’s below the 0.2% growth expected by economists and follows an expansion of 0.5% in the second quarter of the year.

U.K.’s dominant services sector also grew just 0.1% on the quarter, the Office for National Statistics said. Construction rose by 0.8%, while production slipped 0.2% in the month.

It comes after inflation in the U.K. fell sharply to 1.7% in September, dipping below the Bank of England’s 2% target for the first time since April 2021. The fall in inflation helped pave the way for the central bank to cut rates by 25 basis points on Nov. 7, bringing its key rate to 4.75%.

The Bank of England said last week it expects the Labour Government’s tax-raising budget to boost GDP by 0.75 percentage points in a year’s time. Policymakers also noted that the government’s fiscal plan had led to an increase in their inflation forecasts.

U.K. Finance Minister Rachel Reeves said Friday she was “not satisfied” with the numbers.

“At my Budget, I took the difficult choices to fix the foundations and stabilise our public finances. Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal,” she said in a release.

Analysts flagged underlying weakness in the economy and growing risks from geopolitical tensions as potential barriers to further growth.

“It’s clear that the economy has a bit less momentum than we previously thought. And it’s striking that the economy has only grown in two of the past six months,” said Ruth Gregory, deputy chief U.K. economist at Capital Economics.

“Overall, despite the contraction in September, we still expect GDP growth to pick up in the coming quarters as the government’s debt-financed spending boosts activity and as the drags from higher inflation and higher interest rates continue to fade,” Gregory added.

A rate cut at the BOE’s next meeting in December now looks “improbable,” according to Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales. He said inflation risks and growing global headwinds will likely prevent policymakers from pursuing back-to-back rate cuts.

“These figures suggest that the economy went off the boil even before the budget, as weaker business and consumer confidence helped weaken output across the third quarter, particularly in September,” Thiru said in emailed comments.

The outcome of the recent U.S. election has fostered much uncertainty about the global economic impact of another term from President-elect Donald Trump. While Trump’s proposed tariffs are expected to be widely inflationary and hit the European economy hard, some analysts have said such measures could provide opportunities for the British economy.

Bank of England Governor Andrew Bailey gave little away last week on the bank’s views of Trump’s tariff agenda, but he did reference risks around global fragmentation.

“Let’s wait and see where things get to. I’m not going to prejudge what might happen, what might not happen,” he told reporters during a press briefing.

The British pound was broadly flat against the U.S. dollar by mid-morning in London. The euro strengthened 0.4% against the pound following Friday’s GDP release.