UK economy shrinks for second month with little Christmas boost on the cards

The UK economy shrank 0.1 per cent in October, compounding signals that the slowdown may be more severe than previously thought. Chancellor Rachel Reeves described the surprise contraction as "disappointing" but added that the government has "put in place policies to deliver long-term economic growth".

The drop in GDP follows a 0.1 per cent fall in September and has prompted analysts at Capital Economics to note that there is now "every chance that the economy went backwards in Q4 as a whole." The Office for National Statistics said the October contraction was largely down to a decline in production output. The October figure was the first consecutive monthly fall in the GDP reading since March and April 2020. The ONS stressed that "early estimates of GDP are subject to revision".

Economists said it was difficult to assess how much of the decline was attributable to Ms Reeves's budget, which she presented at the end of October. The ONS said that some manufacturers, retailers and employment agencies had reported their turnovers had been “negatively affected” during the month. On the other hand, real estate brokers, lawyers and accountants saw an upswing in activity during October as clients made financial decisions ahead of the budget.

Consumer sentiment figures released on Friday also showed UK shoppers are unlikely to give the economy a festive boost, as they continue to rein in spending and avoid splashing out on big-ticket items in the run-up to Christmas. Research firm GfK’s sentiment indicator rose one point to minus 17, ending the year only slightly above the average reading. “In December, consumers adopted the holding pattern we’ve seen for much of 2024,” said Neil Bellamy, consumer insights director at GfK. “It’s the continuing uncharitable view on the UK’s general economic situation that’s suppressing consumer confidence.”

In November, the Bank of England trimmed its annual growth forecast for this year to 1 per cent, down from 1.25 per cent, but forecast a better 2025 with 1.5 per cent growth, as the UK economy gets a boost from the spending plans outlined in the budget. Nonetheless, business lobby groups said the increase in payroll taxes for employers in the budget would weigh on companies for some time, making growth a difficult goal.

“As we head further into the festive season, and consumer confidence remains in the doldrums, many businesses are continuing the process of updating their business plans for the coming year to accommodate significant increases in employment costs," said Anna Leach, chief economist at the Institute of Directors (IoD). "Unfortunately, as business finances have been under pressure for a considerable period, and monetary policy remains restrictive, the conditions for investment are also unfavourable."

Interest rates

All eyes now turn to the Bank of England's interest rate setting meeting next week, where analysts still believe on balance that the Monetary Policy Committee will leave rates at 4.75 per cent. "We don't think the economy is weak enough to prompt the Bank to follow November's rate cut with another cut at next Thursday's December meeting," said Paul Dales, chief UK economist at Capital Economics. "That said, we're not as confident about that as we were before this data release."

Richard Hunter, head of markets at Interactive Investor, agreed that while the likelihood of a cut to rates by the Bank of England next week was remote, "the pressure is clearly mounting for some rather more aggressive action in the New Year in the face of what has been listless economic growth".

Company Profile

Name: Thndr
Started: 2019
Co-founders: Ahmad Hammouda and Seif Amr
Sector: FinTech
Headquarters: Egypt
UAE base: Hub71, Abu Dhabi
Current number of staff: More than 150
Funds raised: $22 million

Results

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WOMAN AND CHILD

Director: Saeed Roustaee

Starring: Parinaz Izadyar, Payman Maadi

Rating: 4/5

How will Gen Alpha invest?

Mark Chahwan, co-founder and chief executive of robo-advisory firm Sarwa, forecasts that Generation Alpha (born between 2010 and 2024) will start investing in their teenage years and therefore benefit from compound interest.

“Technology and education should be the main drivers to make this happen, whether it’s investing in a few clicks or their schools/parents stepping up their personal finance education skills,” he adds.

Mr Chahwan says younger generations have a higher capacity to take on risk, but for some their appetite can be more cautious because they are investing for the first time. “Schools still do not teach personal finance and stock market investing, so a lot of the learning journey can feel daunting and intimidating,” he says.

He advises millennials to not always start with an aggressive portfolio even if they can afford to take risks. “We always advise to work your way up to your risk capacity, that way you experience volatility and get used to it. Given the higher risk capacity for the younger generations, stocks are a favourite,” says Mr Chahwan.

Highlighting the role technology has played in encouraging millennials and Gen Z to invest, he says: “They were often excluded, but with lower account minimums ... a customer with $1,000 [Dh3,672] in their account has their money working for them just as hard as the portfolio of a high get-worth individual.”

Ten tax points to be aware of in 2026

1. Domestic VAT refund amendments: request your refund within five years

If a business does not apply for the refund on time, they lose their credit.

2. E-invoicing in the UAE

Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.

3. More tax audits

Tax authorities are increasingly using data already available across multiple filings to identify audit risks.

4. More beneficial VAT and excise tax penalty regime

Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.

5. Greater emphasis on statutory audit

There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.

6. Further transfer pricing enforcement

Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.

7. Limited time periods for audits

Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.

8. Pillar 2 implementation

Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.

9. Reduced compliance obligations for imported goods and services

Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.

10. Substance and CbC reporting focus

Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.

Contributed by Thomas Vanhee and Hend Rashwan, Aurifer

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”