UK GDP failed to grow in third quarter as firms warn economy heading for 'worst of all worlds'

The downbeat economic readings provide a blow to Chancellor Rachel Reeves

The UK economy flatlined in the third quarter of the year, according to revised official figures, as firms warned Chancellor Rachel Reeves that the economy is “headed for the worst of all worlds”.

The Office for National Statistics said that UK gross domestic product (GDP) showed no growth between July and September, in the run-up to the Autumn budget.

Statisticians, who had previously estimated 0.1% growth for the quarter, partly blamed the reduction on fresh survey data showing weaker trading across bars and restaurants.The ONS also revised down its growth reading for the second quarter of 2024, to 0.4%. In September, it said it thought GDP had increased by 0.5%, which was itself a reduction on previous estimates.

The downbeat economic readings provide a blow to the chancellor and the government’s hopes to grow the economy rapidly.

Chancellor Rachel Reeves said: "The challenge we face to fix our economy and properly fund our public finances after 15 years of neglect is huge.

“But this is only fuelling our fire to deliver for working people.

“The Budget and our plan for change will deliver sustainable long-term growth, putting more money in people’s pockets through increased investment and relentless reform.”

Shadow chancellor Mel Stride said that “growth has tanked on Labour’s watch” as he reacted to Monday’s figures.Stride said in a statement: “Having inherited the fastest-growing economy in the G7, growth has tanked on Labour’s watch.“That means greater pressure on our public finances and an economy which, far from becoming more secure, is becoming significantly more vulnerable.“The Labour Government must now urgently revisit their disastrous budget and align economic policy with growth not decline. Every moment of delay is further damaging business confidence, output and employment.“The warning lights are flashing.”

It comes as businesses warned Reeves that the economy is “headed for the worst of all worlds” with activity expected to fall sharply in the first three months of 2025.

A recent survey by the Confederation of British Industry (CBI) found that firms are expected to reduce their hiring and output next year.

The chancellor's hike to employers' national insurance, which is expected to generate around £25 billion a year, has been highlighted as one of the reasons.

Alpesh Paleja, the CBI’s interim deputy chief economist, said: “There is little festive cheer in our latest surveys, which suggest that the economy is headed for the worst of all worlds – firms expect to reduce both output and hiring, and price growth expectations are getting firmer.

“Businesses continue to cite the impact of measures announced in the Budget – particularly the rise in employer NICs – exacerbating an already tepid demand environment.

“As we head into 2025, firms are looking to the Government to boost confidence and to give them a reason to invest, whether that’s long overdue moves to reform the apprenticeship levy, supporting the health of the workforce through increased occupational health incentives or a reform of business rates.

“In the longer term, businesses will be looking to the industrial strategy to provide the stability and certainty which can unlock innovation and investment – and provide that much-needed growth for the economy which can deliver prosperity for firms and households alike.”

The CBI's survey's responses, based on 899 companies between November 25 and December 12, found that growth was expected to be at their weakest since November 2022 following the chaotic aftermath of Liz Truss's administration.

The fall in activity will be seen across the board with the service sector anticipated to decline whilst manufacturing and sales output is expected to fall sharply.

The survey found a 24 percentage point gap between companies which gave negative responses on expected output and those which gave positive responses, a worse position than in November when there was a 10-point gap.

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It is the worst figure since the -27 gap in November 2022, a blow to Reeves after a series of economic indicators painted a disappointing picture.

Official figures showed the UK economy unexpectedly contracted in October this year, marking two months in a row of negative growth for the first time since the pandemic.

The Office for National Statistics (ONS) said gross domestic product (GDP) contracted 0.1% in October.

The rate of Consumer Prices Index (CPI) inflation rose to 2.6% in November, its highest level since March and the second monthly increase, while the Bank of England held interest rates at 4.75% as it cautioned over “heightened uncertainty in the economy”.

Shadow business secretary Andrew Griffith said: “Since taking office, the Chancellor has made this country a hostile climate for aspiration, for investment and for growth. Rachel Reeves’s tax-raising spree and trash-talking her economic inheritance are literally killing businesses and jobs.

“If there is a recession – and based on these CBI expectations that seems increasingly likely – it will be one made in Downing Street.

“Labour needs to urgently change course before the damage they are doing becomes even greater.”

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