Deconstructing the possible impacts of a slowdown in UK economic growth

Economic growth slowed across the UK between July and September, according to the most recent official figures.

The UK's economic growth slowed between July and September, according to the latest official figures.

Chancellor Rachel Reeves expressed her dissatisfaction with the numbers, which revealed a mere 0.1% growth in the quarter following Labour’s election victory. But what does this mean, and what will be its impact?

What is gross domestic product?

Gross domestic product, or GDP, is a term commonly used to denote the size of a country’s economy. It measures the financial activities across all companies, governments, and households. Economic growth occurs when households and firms spend more money and create more jobs, while a contraction happens when spending is reduced.

What happened?

On Friday, the Office for National Statistics (ONS) reported that GDP grew by 0.1% in the three months leading up to September. This small increase follows a 0.5% growth in the previous quarter, from April to June.

Compared to the first half of 2024, when the economy was rapidly recovering from a recession in late 2023, things still appear relatively weak. Liz McKeown, ONS director of economic statistics, noted that some sectors like retail and construction performed well, but overall, "Generally, growth was subdued across most industries in the latest quarter."

Why did it slow down?

Several experts have suggested that the slowdown could be due to companies delaying spending decisions until after the Budget. Ben Jones, lead economist at the Confederation of British Industry, believes that uncertainty leading up to the autumn Budget "probably played a big part", as firms reported a deceleration in making spending decisions.

The services sector, encompassing areas such as shops, leisure activities, finance firms and more, remained stagnant in September, growing by a mere 0.1% over the three-month period. Given its significant contribution to the economy, about 80%, this was a key driver of overall GDP. The construction sector experienced 0.8% growth, while the smaller production sector contracted by 0.2%. .

So, what does this mean for the Government?

Typically, slowing economic growth is viewed negatively, and Chancellor Rachel Reeves expressed her dissatisfaction with these figures. Several surveys indicated that companies curtailed spending in the months leading up to the October Budget, which Ms Reeves repeatedly warned would entail "tough decisions".

Shadow chancellor Mel Stride accused Labour of having a "mission to talk down the UK economy". However, it remains unclear how much of the slowdown can be attributed to the current Government, which only assumed office in early July. Luke Bartholomew, deputy chief economist at investment giant Abrdn, suggested that it's "also possible that this just represents normal monthly volatility rather than anything more fundamental".

Will it affect Labour’s spending plans?

Probably not. Ms Reeves expressed on Friday morning her desire for growth to "be stronger, to come sooner, and also to be felt by families right across the country". Moreover, Labour's announcement of a £70bn increase in public spending was made after the period these figures cover. Deutsche Bank's chief UK economist, Sanjay Raja, commented, "The road ahead remains bumpy."

He cautioned that the tax hikes could dampen business investment even more before Labour's spending initiatives begin to positively influence the economy early next year. "We see growth picking up a touch towards year-end. And we still see positive momentum into 2025," he added.

What about the Bank of England?

The Bank of England's decision-makers will scrutinise GDP statistics closely to determine the timing for the next base interest rate cut.

This rate influences borrowing costs, including mortgage rates offered by mainstream banks. In early November, the Bank's Monetary Policy Committee reduced interest rates by a quarter point to 4.75%, with another decision due in December.

However, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, suggested that despite the "downbeat" figures, a rate cut next month seems "improbable". He mentioned that the rate setters are "likely concerned enough over inflation risks from the Budget and growing global headwinds to resist signing off back-to-back interest rate cuts."