Last week’s economic news made for dismal reading. Borrowing by private firms slumped by the most in almost two years. The construction PMI, which is one of the most closely watched business surveys, collapsed to levels last seen in the pandemic and the Global Financial Crisis. The Bank of England’s own business survey also showed employers cutting staff by the most since July 2021. Pretty horrifying stuff. However, much of this is probably more to do with negative sentiment around the chaotic lead up to the 26 November than a collapse in the economy. The data should improve now the Autumn Budget has happened and many of the worst fears haven’t come to pass. But, this scenario is an ample reminder that chaos comes at a cost.

Last week we got lots more evidence that businesses and consumers were changing their behaviour in the run up to the Budget. For example, households added £8.8bn to their asset holdings over the two months to October. That’s more than the previous 11 months combined and will keep household savings rates close to historic highs. Much of this was driven by people saving into ISAs, probably in anticipation of changes to the limits. Consumers also borrowed less in October, suggesting some nervousness about committing to large purchases before the Budget.

Businesses also became more hesitant to borrow in October. The amount of money raised by private non-financial corporations shrank by £4.8bn – the biggest drop since February 2024 – suggesting nervousness about the outlook. You can see the impact of this clearly in our Credit Impulse indicator, which turned negative on this measure.

Elsewhere, the construction PMI was nothing short of catastrophic. The activity balance, which is supposed to reflect how much building work is happening, dropped to its lowest level since the first lockdown and the financial crisis before that. The housebuilding balance was particularly hard hit.

Finally, the Bank of England’s own influential business survey, the Decision Maker Panel (DMP), showed employment falling by 1.8% y/y in November. That’s down from a 0.1% gain in October and the weakest data since July 2021. However, it did show pay growth staying in the 3.5–4% range.

Is there any good news for the UK economy?

The bad news is that the next batch of data for November, due over the next couple of weeks, will probably look even worse because that was the height of Budget speculation.

Yet, there is some good news. We know that a lot of survey data tends to overreact to political news. Sentiment shifts by much more than actual activity. For example, the idea that conditions in the construction sector are almost as bad as during the pandemic or the Global Financial Crisis seems overdone. Indeed, the actual construction data is holding up much better than the PMI has suggested over recent months. So, we doubt the economy really was as weak as the recent batch of data suggests.

What’s more, now the Autumn Budget is behind us and was much more benign than expected, some confidence will likely start to return to households and businesses. This should lead to a bit of a pick-up in the first half of next year.

However, even if some of the recent bad news is exaggerated, we can’t ignore it. The size of the construction PMI’s fall clearly raises the chances that construction output also contracts. The big drop in employment in the DMP also makes it more likely that the unemployment rate rises further over the next few months.

The recent bad data does effectively nail on another interest rate cut next week. But, given growth was just 0.1% in Q3, there’s a very real chance that growth flatlines – or even turns negative in Q4 – before picking up again next year. That’s the cost of chaos.

UK GDP should rebound in October

We expect GDP to rebound in October from September’s drop as production at Jaguar Land Rover (JLR) ramps back up following the cyber-attack that stopped production in September.

Every sector on the production side of the economy saw output fall in September. Much of that should bounce back in October. Production restarted at JLR, albeit not at full capacity, energy demand rose and mining output should recover after big falls over the past couple of months. All in, we expect industrial output to rise 1.1% in October, which should add 14bps to growth.

Unfortunately, the production-side recovery will be offset somewhat elsewhere. October was the third dullest on record according to the Met Office. The UK saw just 63 hours of sunshine. Combined with the arrival of storms Amy and Benjamin, it’s no wonder the already-dismal construction PMI slipped further in October. We expect the sector to shrink 0.3% for the month.

Finally, the all-important services sector probably did little more than stagnate in October. Indeed, retail sales fell 1.1%, which will directly cut 0.5ppts from GDP. New car registrations unwound from their September surge, which means motor trades will weigh on growth by a similar amount.

What’s more, when we translate the slowdown in total sales growth from our CGA RSM Hospitality Business Tracker onto official data, it suggests the hospitality sector collapsed 1.4%m/m in October. We do think the official data will hold up slightly better. But, a poor month for consumer-facing services in October matches the signal from the money and credit data, which showed consumer credit growth slowing to £1.1bn, down from £1.4bn in September.

All told, we expect the economy to eke out 0.1% growth in October. The boost from production restarting at JLR should offset slowdowns elsewhere in the economy just as Budget speculation started to bite. Looking ahead, Budget speculation only ramped up in November, so we reiterate our call for just 0.1% growth in Q4.

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