The UK economy almost flatlined in October, adding to worries about the recovery from the coronavirus pandemic.
New data released by the Office for National Statistics (ONS) on Friday showed that GDP grew by just 0.1% in the month, below the 0.4% that economists had forecast, thanks to ongoing supply chain disruptions and staff shortages.
This remained below the pre-pandemic level of 0.5% in February 2020, and suggests that the UK economy was struggling even before the discovery of the Omicron variant in late November.
The ONS said that services output grew back to its levels before the start of the health crisis, growing 0.4% in October, driven by human health activities due to a rise in face-to-face appointments at GP surgeries in England.
Output in consumer-facing services grew by 0.3% on the month mainly because of an 8.1% increase in the wholesale and retail trade and repair of motor vehicles and motorcycles sector. But output at restaurants and hotels fell by 5.5%.
Meanwhile, production output decreased by 0.6% during the period, with electricity and gas down by 2.9%, mining and quarrying down by 5.0%, and construction contracting 1.8% in the month.
“Growth disappointed in October, reinforcing concerns about the resilience of the UK’s economic recovery to the Omicron variant and the impact of further restrictions,” Alpesh Paleja, CBI lead economist, said.
“We need to create consistency in our approach and build confidence by reducing the oscillation between normal life and restrictions as we learn to live with the virus and its variants.
“Meanwhile, supply pressures remain acute and further rises in inflation are looming. We expect growth to build further momentum ahead, but more action is needed to address longer-term challenges, including “scarring” from COVID and poor productivity.”
Chancellor Rishi Sunak said: “We’ve always acknowledged there could be bumps on our road to recovery, but the early actions we have taken, our ongoing £400bn economic support package and our vaccine programme mean we are well placed to keep our economy on track.”
However, businesses are warning that the government’s new Plan B restrictions will mean a further hit for growth and affect jobs unless the Treasury provides more support, including the restart of the furlough scheme to help hard-hit sectors.
As part of the new measures announced this week by UK prime minister Boris Johnson, people must work from home where possible from Monday, and face masks will be a legal requirement in most public indoor areas such as theatres and cinemas from Friday.
However, there will be exemptions for eating and drinking in hospitality venues.
Vaccine passports will also be needed to attend large, potentially crowded venues such as nightclubs from next week.
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Paul Dales, chief UK economist at Capital Economics, said: “at such low rates of growth, the government’s 'Plan B' COVID-19 restrictions could be the difference between the economy growing or contracting in December.
“We estimate that the 'Plan B' COVID restrictions may reduce GDP by 0.0-0.5pc in December. That means it is touch-and-go whether the economy will grow or contract this month. Against that background, we doubt the Bank of England will raise interest rates next Thursday.”
Economists are predicting that the Monetary Policy Committee (MPC) will take no action on the current 0.1% rate when it meets on 16 December amid concerns that an increase would add pressure on the economy.
Traders have also cut their bets on a rise in recent weeks, with foreign exchange positioning implying a 36% chance of an increase in rates, which previously was as high as 70% last month.
Elsewhere, Rory Macqueen, principal economist at NIESR said: "Supply chain issues may have been a factor in slower than expected October growth rate: something which will be compounded by the emergence of the omicron variant, which will cause a rise in social distancing, both mandated and voluntary, in December and early 2022. Its overall economic impact is likely to be smaller than the first and second full lockdowns, but will delay the return of GDP to its pre-COVID level.”
"At this stage in the recovery, growth of 0.1% in October will be concerning to policy makers," Jonathan Gillham, chief economist at PwC UK, said. "If the Omicron variant plays out in line with initial concerns there could be further problems in the months ahead. Nonetheless, there are some signs of business confidence - activities of temporary recruitment agencies grew rapidly reflecting strong labour market performance and households are booking holidays.
"There is still considerable optimism about the recovery and this may yet still drive growth in the months ahead. However, this optimism is conditional on inflation and a potential interest rate rise not hitting household spending levels. Rising inflationary expectations, a weak pound and exposure to new COVID variants are seen as the key risks to the economy over the coming months."
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