Analysis: Reeves faces recession fears but shrinking industry could offer a bigger problem

The UK economy shrank again in October, putting economists on “recession watch” in a blow to Chancellor Rachel Reeves’ plan to turn productivity around.

But lurking in the new figures is a more long-term problem.

The Office for National Statistics (ONS) said output fell by 0.1 per cent following the 0.1 per cent decline recorded in September, raising the spectre of a quarter of shrinkage if growth does not return.

This covers the month ahead of the government’s first budget, where speculation over tax rises caused businesses to hold off on hiring and investing decisions.

Julian Jessop, economics fellow at the Institute of Economic Affairs, warned: “The second successive monthly fall in economic activity in October should put the UK firmly on recession watch.”

The UK’s wobble has not happened in isolation, he added: “Indeed, the manufacturing sector appears to be struggling even more in the rest of Europe, notably Germany and France.

Germany’s economy is set to shrink for a second year in a row and only grow slowly after that, according to their central bank.

An end to cheap natural gas from Russia and weaker demand for its cars from China has been depressing its growth for some time.

Germany is Europe’s largest economy and it relies heavily on its huge manufacturing sector which makes cars under the VW, Audi, Porsche, BMW and Mercedes brands, as well as aerospace parts and chemicals.

But Britain’s position is arguably worse because of a long period of unimpressive economic growth. Germany’s output per person is $55,500 according to the International Monetary Fund, while the UK’s is only $52,400.

Britain too has a problem with weak manufacturing, an area of commerce that provides valuable exports, as well as employment and skills.

Mr Jessop added: “The new government’s negative rhetoric over the summer and the anticipation of a tight Budget have damaged sentiment and encouraged many households and business to put spending, hiring and investment on hold.”

Much of the hit to Britain’s output was borne by industry and construction.

Monthly construction fell 0.4 per cent by volume in October following an increase of 0.1 per cent in September, according to the Office for National Statistics.

Perhaps more worrying is the decline in making chemicals, machinery and pharmaceutical products Britain suffered, which all fell 0.2 per cent or more.

These industries can have high profit margins and offer good jobs.

The chemicals industry has been shrinking for some time and companies and unions have asked the government for help in bolstering the industry.

The closure of plants has been steady in recent years, with Ineos closing a plant in Teeside 2020 with the loss of 145 jobs; two years later a fertiliser plant in Cheshire owned by CF Industries closed, with the loss of 283 jobs.

Last year, Japan’s Mitsubishi closed its UK methacrylate plant at Teeside, which made chemicals for plastics, with more than 200 jobs lost.

And, more recently, Vauxhall’s owner has said it will close its Luton plant, threatening 1,100 jobs.

Industry in general has warned for a long time that high power costs are among the challenges of maintaining jobs in the UK.

The ONS said the services sector recorded no growth in October after also stalling in September.

The latest economic news comes as the government continues to face criticism over the more controversial elements of the Budget, including changes to inheritance tax which will hit some farmers and the winter fuel payment.

Tory leader Kemi Badenoch said figures showing the economy shrank in October show that Rachel Reeves’ Budget is “crashing the economy”.

She told the PA news agency on a visit to Essex: “I think it shows that the Prime Minister and the Chancellor have been making the wrong choices. They inherited an economy that was growing and now it is shrinking. Their Budget is crashing the economy and they need to reverse this

But Ms Reeves has insisted that things will pick up for the UK.

“The numbers on today’s GDP are disappointing, but it’s not possible to turn around more than a decade of poor economic growth and stagnant living standards in just a few months,” she Reeves said.

But if industry is to grow again, she will need to come up with a plan.