UK Economy Stops Growing Even Before Omicron Measures Bite

The UK economy hardly grew at all in October, with GDP edging higher by a mere 0.1%, according to the Office for National Statistics (ONS).

Economists had expected UK GDP to improve by 0.4%. The latest figures will complicate the calculations of the Bank of England, where policymakers were expected to raise rates his month or next to fight inflation running at 4.2%.

UK GDP grew 0.6% in September, so October’s data represents a sharp reversal.

Supply chain dislocation is hurting growth prospects as manufacturers and confirms in the construction industry particularly badly hit. In addition to shortages of materials and parts, labour supply is also constrained.

Services, which accounts for the majority of economic activity, also slowed.

The pound is falling against the US dollar in the light of the GDP data. GBP/USD is down 0.15% to 1.31995, while the FTSE 100 index of uk shares is 0.13% lower at 7311.

Omicron could take £2 billion a month out of economy

The sharp decline in GDP indicates that the economic recovery is slowing to a halt – and that is even before the impact of Omicron is factored in. Fears that economic activity could actually contract going into the new year is a real possibility, although, but that depends on how severe disease from the new variant is.

Bloomberg Economics estimates that the latest restrictions to control Covid infection rates will cost the economy £2 billion a month.

ONS chief economist Grant Fitzner, said there were areas of the economy that did see growth, such as in the used car market, employment agencies, hairdressing and the health sector.

“Taken as a whole, the dominant services sector reached its pre-pandemic level for the first time in twenty months,” Fitzner commented.

Slowdown in oil & gas and construction industries

But less activity in the oil and gas industry, where extraction dropped and a pull back from strong summer trading in the restaurant sector combined to act as a drag on GDP.

Housebuilding and infrastructure were hard hit, leading to the deepest decline since April, falling by 1.8%. Overall production output shrank 0.6% as the tight labour market and shortages of key inputs crimped the ability of firms to fully cater to demand.

Slowdown in the services sector was in no small part due to greater health activity, thought to be driven by an increase in the number of face-to-face appointments taking place at GP surgeries in England.

UK economic output is still 0.5% below pre-pandemic levels. The hit to consumer spending expecting from the latest public health measures had already led some analysts to doubt whether the Bank of England would raise rates. The poor October GDP data will add fuel to that view.

Later today the US inflation figures are on tap and forecasters are expecting the headline data to deteriorate further, perhaps to a 40-year high of 6.8%, up from the 30-year high of 6.2%