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UK Economy Stalls in October, Sees Weak Start to Final Quarter 

© IRStone, Adobe Stock 

- UK economy stalls in October as construction sector weighs.

- GDP grows 0% in October after a sharp fall in building output.

- All main sectors of economy slowed in three months to October.

- Poor start to Q4 sets economy up to miss 2019 onsensus on GDP.

The UK economy stalled in October during what was a weak start to the final quarter that could now mean its all but certain that growth for the 2019 year overall will be less than an already-downbeat consensus expects. 

UK GDP was unchanged in October, the Office for National Statistics said Tuesday, after a steep contraction in the value of output from construction industry came on top of more moderate performances for other key sectors including manufacturing and services. 

Construction output fell 2.3% in the October amid declines in residential building and infrastructure development activity. Meanwhile, industrial production growth came in at just 0.1%, paring a prior 0.3% fall, after increases in manufacturing and energy production were tempered by declines in minining output. 

Breakdown by sector

Services output rose 0.2% and if not for that adding 0.06% to GDP the economy could well have faced another contraction in October, which would have been a third consecutive decline.

"What’s more, retail sales will probably be a drag on GDP in November as this year the survey period excludes Black Friday (although that burst of activity will be captured in December’s data). So it looks as though Q3’s 0.3% q/q rise in GDP will be followed by GDP not rising at all in Q4. Even a contraction is possible," says Paul Dales, chief UK economist at Capital Economics. 

The weak October performance and hat-trick of earlier poor numbers has pulled the three-month and annualised UK GDP growth rates down to new lows. The economy did not grow at all in the three months to the end of October and in the 12 months to the end of October, growth was just 0.7%. 

Consensus has envisaged GDP growth of 1.3% for 2019 overall throughout the year, although that now looks to be an ambitious target because the economy would have to grow 0.5% in the final quarter in order to achieve it and Tuesday's numbers mean that's unlikely. 

GDP contracted by 0.1% in the second quarter after rising 0.6% in the first three months of the year, while the third quarter brought an expansion of 0.3%.

UK GDP December

"With GDP in October merely in line with Q3’s average, it now looks set to undershoot the MPC’s forecast for a 0.2% quarter-on-quarter increase in Q4. Nonetheless, if the general election yields a majority in the Commons either to ratify the PM’s existing deal or to change course to a much softer form of Brexit or none at all, then the subsequent recovery in business and consumer confidence likely would enable the economy to regain some momentum," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

The economy has been buffeted by both domestic and international headwinds in recent months while Tuesday's figures come just days out from the third general election in five years, the outcome of which could leave a mark on the economy for a while to come. 

President Donald Trump's trade war with China has badly wounded the global manufacturing sector and driven a broad slowdown in international trade. Markets are currently waiting to hear if on December 15, he will go ahead and impose tariffs on all of China's remaining annual exports to the U.S. That would deal the global economy another blow. 

Brexit has also made a mark on the economy, driving a slowdown in business investment and prompting wild swings in inventory levels at manufacturers, which has also had an impact on the GDP figures. Markets are looking keenly to Friday morning when the election result will become known because the Conservative Party victory tipped by pollsters would likely enable Prime Minister Boris Johnson to pass his withdrawal agreement through parliament. 

Currency markets favour a Conservative government. A part of the market bias comes from a desire among investors to negate the threat of a 'no deal' Brexit and also see the economy move on from the current stage of negotiations, which has paralysed the Bank of England and some businesses, while the rest is centred on fears about the opposition's economic agenda.

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