Britain’s economy shrunk unexpectedly in the three months to October, official data released Friday shows, raising the likelihood of interest rate cuts by the Bank of England (BoE) in response to softening economic activity.

The Office for National Statistics (ONS) reported that gross domestic product (GDP) contracted 0.1% in the August-to-October period, defying economists’ forecasts of flat growth. On a single-month basis, October GDP also fell 0.1%, compared with expectations of a 0.1% increase, highlighting persistent weakness in the economy.

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Sectoral Performance and Economic Pressures

The contraction reflected sharp declines in the services sector and construction output, as well as a poor performance by retailers, which weighed on overall services output, which fell 0.3% in October.

The manufacturing sector also struggled to recover, following disruptions in September caused by a cyberattack on Jaguar Land Rover, dampening expectations for a rebound. Overall, compared with a year earlier, economic output was 1.1% higher, below economists’ forecast of 1.4% annual growth.

Finance Minister Rachel Reeves faced these challenging conditions as she prepared the November 26 budget, which included significant tax increases amid stagnant economic growth.

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Implications for Monetary Policy

Following the GDP release, sterling fell slightly against the U.S. dollar. The data has led investors to assign a roughly 90% probability of a Bank of England interest rate cut on December 18, as the central bank seeks to stimulate growth amid persistent economic softness.

The unexpected contraction casts doubt on the BoE’s earlier expectation of 0.3% GDP growth in Q4 2025, emphasizing the fragile recovery in the UK economy and the need for accommodative monetary policy to support both the services and construction sectors.

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Outlook

Economists say the UK economy faces continued headwinds from weak domestic demand, ongoing inflationary pressures, and structural challenges in key sectors. While policymakers aim to encourage growth and job creation, the latest ONS data suggests the BoE may need to adjust its interest rate trajectory to prevent a deeper slowdown.