Fresh evidence of economic weakness has reinforced expectations that the Bank of England is about to pivot decisively toward easing, as the U.K. economy slipped for a second consecutive month in October. Output contracted by 0.1 percent from September, defying forecasts for a modest expansion and extending a period of stagnation that has now persisted since early summer. The persistence of weakness, rather than its magnitude, is what has sharpened the policy signal.
The underlying drivers of the slowdown point to a domestic demand problem. Services activity, which accounts for the majority of U.K. output, weakened further, with retail spending falling 1.1 percent as households delayed purchases ahead of the autumn budget and amid lingering uncertainty around future tax and income policy.
Manufacturing output improved, supported by the restart of production at Jaguar Land Rover after a cyberattack, but that rebound failed to offset broader softness. The imbalance highlights an economy struggling to generate internal momentum even as temporary supply disruptions fade.
Financial markets interpreted the data as confirmation rather than surprise. Sterling edged lower following the release, reflecting expectations that policy rates will move lower sooner and further than previously assumed. A rate cut at the Bank of England’s next meeting was already the base case, but the October data strengthens the argument that easing will continue into 2025 as policymakers seek to cushion demand and prevent a deeper slowdown.
External factors offer limited relief. Earlier in the year, growth benefited from a surge in exports as U.S. buyers accelerated orders ahead of higher tariffs. That support has now dissipated, leaving the U.K. exposed to a less favorable trade backdrop. The imposition of a 10% tariff on most U.K. exports to the United States is lower than the burden faced by European Union peers, but still represents a material tightening relative to conditions at the start of the year. As a result, exports are unlikely to provide a meaningful buffer against domestic weakness.
Fiscal policy has also failed to lift sentiment. While the government avoided immediate tax increases and falling borrowing costs should ease pressure on public finances over time, the budget did little to reassure households or businesses about the medium-term outlook. Official forecasts reflect this tension, with growth expectations revised higher for 2025 but lowered for the years beyond, largely due to concerns about productivity. For investors, this implies that monetary policy will remain the primary tool for stabilizing growth.
The outlook now hinges on how quickly easing feeds through to activity. The base case is that a series of rate cuts through 2025 gradually lowers borrowing costs, supports household demand, and prevents the current slowdown in services from becoming entrenched. The key risk is that weak confidence and external trade pressures blunt the impact of easier policy, delaying any recovery and leaving growth stuck at low levels for longer than anticipated.