UK economy shrinks unexpectedly as GDP falls 0.1% – what it means for your money
THE UK unexpectedly economy shrank in October, latest figures from the Office for National Statistics (ONS) show.
The ONS said gross domestic product (GDP) contracted 0.1% in October.
Most economists had been expecting GDP to rise by 0.1% during the month.
However, production output fell by 0.6% last month and was the largest contributor to the overall fall in GDP in the month.
Construction fell by 0.4%, while services showed no growth.
Liz McKeown, the ONS’s director of economic statistics, said: “The economy contracted slightly in October, with services showing no growth overall and production and construction both falling.
“Oil and gas extraction, pubs and restaurants and retail all had weak months, partially offset by growth in telecoms, logistics, and legal firms.
“However, the economy still grew a little over the last three months as a whole.”
GDP is one of the main indicators used to measure the performance of a country’s economy.
When GDP goes up, the economy is generally thought to be doing well.
But when GDP falls, the economy isn’t doing so well.
Chancellor Rachel Reeves, responding to October’s GDP statistics, said: “We are determined to deliver economic growth as higher growth means increased living standards for everyone, everywhere.
“While the figures this month are disappointing, we have put in place policies to deliver long-term economic growth.”
What does it mean for my money?
This is mixed news, not just for the economy but for your finances too.
GDP measures the economic output of companies, individuals and governments.
It’s also a measure of how healthy and prosperous an economy is.
Most economists, politicians and businesses want to see GDP rising steadily.
This is because it usually means people are spending more, more tax is paid to the government and workers get better pay rises.
This is because it usually means people are spending more, more tax is paid to the government and workers get better pay rises.
A healthy economy usually means lower inflation, rising employment, less poverty, and more money in your pocket.
Lower inflation is good because it means prices don’t rise as fast, putting less financial pressure on households.
The Bank of England (BoE) uses GDP and inflation as key indicators when determining the base rate.
This decides how much it will charge banks to lend them money and is a way to try to control inflation and the economy.
Usually when inflation is low, the BoE would cut interest rates to try to speed the economy up.
The Consumer Prices Index (CPI) rate of inflation stood at 2.3% in October, following a fall to 1.7% in the previous month.
However, this is still significantly lower than October 2022, when it peaked at 11.1% following soaring wholesale energy prices.
Lower inflation is good because it means prices don’t rise as fast, putting less financial pressure on households.
However, if GDP growth is steady but low, the bank may decide to refrain from cutting interest rates too quickly to ensure a consistent flow of cash into the economy.
Alice Haine, personal finance analyst at Bestinvest, said: “The UK economy shrank in October – following an unrevised contraction of 0.1% in September – as the Government’s doom-mongering about the state of the public finances in the run up to the Budget dented activity.
“The surprise fall in output will be worrying for consumers and business as it puts recession chatter back on the table and signals that the final quarter may be even worse than the third when growth almost stalled.”
The BoE will be watching the latest GDP figures closely as it decides whether to lower its base rate further in December.
The central bank cut the base rate from 5% to 4.75% last month after previously holding the rate in September.
The next Bank of England base rate review is scheduled for Thursday, December 19.
High street banks and lenders use the BoE base rate to set their own interest rates on mortgages, loans and savings accounts.
If it comes down, interest rates on mortgages, loans and savings accounts tend to fall too.
Mortgage lenders also tend to bring down rates in anticipation of the base rate falling.
What is the base rate and how does it affect the economy?
NINE members of the Bank of England's Monetary Policy Committee meet eight times each year to set the base rate.
Any change to the Bank’s rate can have wide-reaching consequences as it directly influences both:
- The cost that lenders charge people to borrow money
- The amount of savings interest banks pay out to customers.
When the Bank of England lowers interest rates, consumers tend to increase spending.
This can directly affect the country’s GDP and help steer the economy into growth and out of a recession.
In this scenario, the cost of borrowing is usually cheap, and the biggest winners here are first-time buyers and homeowners with mortgages.
But those with savings tend to lose out.
However, when more credit is available to consumers, demand can increase, and prices tend to rise.
And if the inflation rate rises substantially – the Bank of England might increase interest rates to bring prices back down.
When the cost of borrowing rises – consumers and businesses have less money to spend, and in theory, as demand for goods and services falls, so should prices.
The Bank of England is tasked with keeping inflation at 2%, and hiking interest rates is a way of trying to reach this target.
In this scenario, the losers are those with debt.
First-time buyers will lose out to cheaper mortgage rates, and those on tracker or standard variable rate mortgages are usually impacted by hikes to the base rate immediately.
Those on a fixed-rate deal tend to be safe if they fixed when interest rates were lower – but their bills could drastically increase when it’s time to remortgage.
The cost of borrowing through loans, credit cards and overdrafts also increases when the base rate rises.
However, the winners in this scenario are those with money to save.
Banks tend to battle it out by offering market-leading saving rates when the base rate is high.
How to protect your finances
If you are concerned about your finances, it is important to remember that there are ways to keep your cash safe.
Make sure you go through all your bank statements and accounts so you know what your income and outgoings are every month.
You can save money by moving to a cheaper mobile phone tariff or by axing subscriptions you don’t need like Netflix or Amazon Prime.
If you’ve got any outstanding debts, don’t ignore them as it will only make your financial situation worse.
Stay on top of what you owe and always repay priority debts.
There are plenty of organisations where you can seek debt advice for free.
You should also check what benefits you are eligible for as you might be able to claim without realising.
Entitledto’s free calculator works out whether you qualify for various benefits, tax credits and Universal Credit.
If you don’t want to register, consumer group moneysavingexpert.com and charity StepChange both have benefits tools powered by Entitledto’s data that let you save your results without logging in.
There is also emergency funding available for struggling households, which is dished out by local councils.
The Household Support Fund is designed to help those on a low income or benefits cover the cost of food, energy and general living costs.
What help is available varies depending on where you live as each council sets its own eligibility criteria.
It’s worth getting in touch with your local authority to see what you might be able to get.
You can find what council area you fall under by using the government’s council locator tool online.