British Economy Shrinks, Recession Risk Increases; BOE Decision On Interest Rate In Focus

Britain's economy shrank in the month of October, reported Reuters quoting official data published Wednesday. The shrinking UK economy has raised the risk of a recession. It remains to be seen how long the Bank of England sticks to its tough anti-inflation line against cutting interest rates from their 15-year high.

The Office for National Statistics data showed that the country's Gross domestic product (GDP) declined by 0.3% from September. Exceptionally wet weather seems to have impacted the GDP data.

According to the Reuters report, it was the first time since July that GDP had shrunk ona month-by-month (MoM) basis. Sterling fell by about a third of a cent against the US dollar and was weaker against the euro too. Investors added to their bets on the BoE starting to cut interest rates in June 2024, and the yield on 10-year British government bonds fell to its lowest since May.

However, the country's central bank is widely anticipated to keep the Bank Rate at 5.25% on Thursday and signal once again that it is not close to cutting them as it tries to ensure that Britain's still-high inflation rate - 4.6% at its most recent reading in October - is brought under control.

Paul Dales, chief UK economist at Capital Economics, was quoted by Reuters as saying that the October data suggested Britain might be in a recession.

"That may nudge the Bank of England a little closer to cutting interest rates, although when leaving rates at 5.25% tomorrow the Bank will probably push back against the idea of near-term rate cuts," Dales said.

The UK economy has flat-lined through most of this year with economic output now back at its January level.
Britain's huge services sector shrank by 0.2% in October. Manufacturing and construction contracted by 1.1% and 0.5%.

UK Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt have promised to expedite growth but no big pickup is foreseen before an election that Sunak must call before January 2025.

Separate data showed Britain recorded a larger-than-expected goods trade deficit in October at 17 billion pounds ($21.30 billion).