UK economy stumbled during bumpy run-up to budget

By Andy Bruce and Suban Abdulla

MANCHESTER, ⁠England, Dec 12 (Reuters) - ⁠Britain's economy ‍shrank unexpectedly in the three months to October, losing momentum in the fraught run-up to finance minister Rachel Reeves' budget, according to data on Friday that underscored bets on ‍Bank of England interest rate cuts.

The Office for National Statistics said gross domestic product ​contracted by 0.1% in the August-to-October period. Economists polled by Reuters had forecast a flat reading.

In October alone, the economy ​contracted by 0.1%, against forecasts for a 0.1% rise. While single-month GDP figures are volatile and prone to revision, Friday's data means the economy hasn't grown since June.

That underlined the tough economic backdrop faced by Reeves when she prepared ​her tax-raising budget, announced on November 26 after several weeks of speculation and briefings that had bamboozled investors, consumers and businesses.

Reeves criticised the series of leaks this week.

Sterling fell slightly against the U.S. ​dollar and British government bond prices rose after Friday's data, which showed unexpectedly sharp declines in the dominant services sector as well as ‌construction.

"Contractions in both services and construction indicate broad-based weakness, potentially reflecting uncertainty in the run-up to the budget," said Fergus Jimenez-England, associate economist at the National ​Institute of Economic and Social Research think tank

BANK OF ENGLAND RATE ⁠CUT EXPECTED

Friday's data casts doubt on the BoE's expectation that the economy will grow by around 0.3% in the fourth quarter as a whole.

Economists polled by Reuters ‌are unanimous that the BoE will cut interest rates on December 18 and financial markets assign a roughly 90% probability.

Manufacturing output, impaired in September by a cyber attack on Jaguar Land Rover, failed to recover as economists had ‌hoped.

The ONS said retailers in particular had a bad month, part of the reason why services output contracted by 0.3% ‌in October against forecasts for a flat reading.

In response to the data, the finance ministry said it was determined to defy the forecasts on growth and create good jobs.

Compared with a year earlier, economic output was 1.1% higher in ‍October, the ONS said, weaker than the 1.4% expansion forecast by economists.

The Confederation of British Industry on Friday bumped up its economic growth forecast for next ⁠year, citing a temporary boost to government spending following the budget, while warning that deep-rooted problems remain.

The business association predicted the economy will grow 1.3% next year, up from its previous forecast of 1.0% in June, bringing the CBI broadly into line with forecasts from the International Monetary Fund and the OECD.

(Reporting by Andy Bruce and Suban Abdulla; Editing by Kate Holton)

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