The UK economy contracted by 0.1% again in October, matching September’s equally poor figure. A rebound in industrial output, largely thanks to production restarting at Jaguar Land Rover (JLR), was offset by big falls in services and construction as pre-Budget nervousness started to bite. If there were any lingering doubts around whether the Monetary Policy Committee (MPC) will cut rates next week, then this latest data should dispel them. Looking ahead, Budget speculation only ramped up in November, which raises the risk that the economy will stagnate, or even contract, in Q4.

UK pre-Budget jitters and storms drag on October’s output

The UK economy contracted by 0.1% in October as a rebound in industrial production wasn’t enough to offset large falls in both services and construction activity.

Industrial production rose 1.1% on the month, exactly in line with our forecast. JLR restarting production accounted for a little over a third of the rise, while a surge (4.3% m/m) in mining activity boosted growth here too.

However, construction activity fell 0.6% in October and services activity dropped back by 0.3%. Admittedly, some of that weakness in construction will be down to stormy weather, but we think much of the weakness here is likely down to nervousness ahead of the Budget. Indeed, the usually stalwart professional services sector − the subject of a whole host of pre-Budget tax rumours − contracted for a fourth straight month.

All told, Budget uncertainty clearly got to firms in October. Weak survey data for November suggests this only grew, so we’re bracing ourselves for another poor month here too − the third in a row.

Is a contraction on the cards for Q4?

Looking ahead to the rest of Q4, we think stagnation, or even contraction, seems increasingly likely. Increased Budget uncertainty likely continued to dampen activity throughout November. Admittedly, much of that activity is likely postponed, rather than cancelled, meaning growth should pick back up in Q1.

In any case, the economy would need to grow strongly in the remaining months of this year to meet our call of 0.1% in Q4, so we’re now expecting stagnation for the final quarter. The wild card here continues to be the recovery in vehicle manufacturing. The sector is still 21.8% below August’s levels and the ONS reported that firms in other sectors of the economy, such as motor trades, were being impacted by the disruption. This will gradually rebound across Q4, lifting growth.

The good news is that after two months of contraction the MPC is all but guaranteed to cut interest rates next week.

Turning to 2026, we expect growth of 1.2%. Further interest rate cuts and a sharp slowdown in inflation will help encourage consumers to get out and spend. However, a weaker labour market and slower growth in real household disposable income will likely drag on activity. The bigger picture is that without reforms to support productivity-boosting growth, the UK looks to be rangebound between 1−1.5% for the rest of the decade.

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