UK economy grew just 0.1% in October as Omicron clouds outlook

New Covid-19 restrictions set to have a further dampening effect on Britain's GDP

Commuters in the city of London will become a rarer sight next week after the government announced new work-from-home measures to combat Covid-19. Getty Images

Britain’s economy barely grew in October, with an uplift of just 0.1 per cent, as the supply chain crisis hit manufacturing and construction.

The tiny rise in gross domestic product was down from the 0.6 per cent rise seen in September, the Office for National Statistics said on Friday, with a further loss of momentum likely after the UK rolled out fresh restrictions to tackle the spread of the Omicron coronavirus variant.

Chancellor of the Exchequer Rishi Sunak said the government had “always acknowledged there could be bumps on our road to recovery”, however he insisted the “early actions” taken, including the £400 billion ($528bn) economic support package and vaccine programme, means the UK is well placed “to keep our economy on track”.

“We have still been recovering quicker than expected, with more employees on payrolls than ever before and redundancies remaining low,” he added.

Britain had been staging the strongest recovery from the pandemic in the G7, after bouncing back once restrictions were fully lifted from the third lockdown in England in July.

However, the outlook for the end of the fourth quarter now appears bleak after Prime Minister Boris Johnson unveiled new measures on Wednesday to tackle Omicron, including guidance that people should work from home.

Analysts estimate the curbs could cost the economy as much as £2 billion a month and deliver a 2 per cent hit to GDP at a time when the economy is still 0.5 per cent below pre-pandemic levels.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said the latest reading for the economy shows just how vulnerable the economy is to a fresh shock.

In October, manufacturing flatlined and construction shrank as both sectors continued to experience shortages of materials and components. That offset a gain for services that brought the sector back to pre-pandemic levels.

The increase in services was driven by more face-to-face appointments with medical doctors. Consumer-facing services were 5.2 per cent below pre-Covid levels, despite a retail sales-driven gain in October.

“The spread of the Omicron variant is now set to be the body blow, sending the recovery reeling, while prices continue to climb,” Ms Streeter said.

“Supply chain problems are eating into production, with manufacturing at a standstill, while construction and industrial output are sinking. The latest snapshot of the services sector shows it’s also more fragile than estimated, with the meagre 0.4 per cent growth registered mainly down to face-to-face GP appointments resuming.”

The potential hit to consumer spending from the latest Covid variant has left traders almost convinced the Bank of England will refrain from raising interest rates until February. Until recently, a December hike was fully priced in due to acute labour shortages driving up wages and inflation, which the central bank expects to surpass 5 per cent next year.

“Although a rate rise can’t be completely ruled out next week, most bets are off that the Bank will push them up so soon, given this latest downbeat reading and the fact that the Omicron variant is still an unknown quantity in terms of the extra pressure it will put on the health service,” said Ms Streeter.

“A rate rise in February is more likely to be on the table, as the inflation kettle is set to be whistling loudly by then. That is unless restrictions are ramped up dramatically, pushing the economy into an even tighter recovery position.’’

Looking ahead, the outlook looks grim, said Danni Hewson, a financial analyst at AJ Bell, when you consider the flurry of new hires might only be on temporary contracts, clocking on to help with Christmas demand, or for Covid cover.

“There are big questions about how the economy can be expected to fare in the new year. The government asked consumers to spend their way out of the country’s pandemic stupor and they did,” she said.

“Cushioned by furlough, bolstered by the stamp duty holiday and tempted by one-off campaigns people were ready and able to help out. 2022 is already shaping up to be a different proposition.”

Ms Streeter said the worse has yet to come as the “Plan B” order gets under way, which will funnel more spending away from services to goods, doing little to ease inflation.

“After last year’s cancelled Christmas, another watered down celebration will be hard to stomach for the hospitality industry”, she said.

“City centres were already struggling to regain pre-pandemic levels of footfall, and now it’s feared they will be deserted once again. Already there are signs that social lives are being curtailed even before the new Covid passes are brought in, with restaurant bookings for the week to Monday falling to their lowest since restrictions on indoor hospitality eased in May.”

Paul Dales, chief UK economist at Capital Economics, expects the new restrictions to reduce GDP by 0.0-0.5 per cent in December.

“That means there’s a very real risk of the economy contracting in December,” he said.

“The greater risk is that the Omicron variant leads to another lockdown early next year. That could reduce GDP in January by 3 per cent month-on-month.”

Updated: December 10th 2021, 9:49 AM