Chancellor Rachel Reeves under further pressure after UK economy shrinks

Official figures showed the UK economy shrank for the second month running in October, contracting by 0.1 per cent following a 0.1 per cent decline in September.

In response, firms urged the Scottish Government to cut business rates in its Budget next month. The Scottish Retail Consortium said “it will be a long winter for Scotland’s shopkeepers” without an “unashamedly pro-growth Scottish Budget”.

The Federation of Federation of Small Businesses said the Scottish Government has “a golden opportunity“ to “breathe new life into our high streets.”

Most economists had been expecting a rise of 0.1 per cent for October on hopes of a manufacturing bounceback led by Jaguar Land Rover’s (JLR) recovery from a major cyber attack.

The Office for National Statistics (ONS) said gross domestic product (GDP) fell as car manufacturing activity only made a “slight” recovery from the woes at JLR, with the services sector weighed down as consumers held back spending on the high street before the Budget, delivered on November 26.

The data shows the UK economy has now not grown since June, with GDP either flat or falling in the past four months.

David Lonsdale, Director of the Scottish Retail Consortium, said: “The economy remains in something of a funk with growth forecasts for the new few years underwhelming. Scotland’s retailers are straining to trade profitably against a backdrop of flatlining retail sales, flaccid levels of shopper footfall, and faltering consumer confidence.

“Meanwhile, government-mandated costs are mounting. That’s a real worry as many retailers need a good performance over the festive period to tide them over the leaner months of trading early in the new year.

“It reinforces the need for an unashamedly pro-growth Scottish Budget next month. If Finance Secretary Shona Robison doesn't deliver a business rate discount for all retailers which is at least as competitive as the new lower rate in England, then it will be a long winter for Scotland’s shopkeepers.”

Guy Hinks, Federation of Small Businesses Scotland Chair, said: “This will come as no surprise to anyone who has been listening to what small businesses have been saying in recent months. Conditions are tough out there with businesses experiencing significant cost pressures and confidence in the doldrums.

“Almost one in three small businesses in Scotland tell us they expect to shrink, shut down or sell up in the coming year, with fewer than one in five predicting growth.

“This only serves to underline the importance of government at all levels focusing on solid pro-growth measures. Most immediately, we will be looking to the Scottish Government’s forthcoming Budget to prioritise moves to ease some of these cost pressures, shelter small businesses and protect jobs.

“With an extra £820 million as a result of the UK Budget, and no need to set aside funds planned for mitigating the two-child benefit cap, the Scottish Government has a golden opportunity. It can breathe new life into our high streets by lowering business rates for particularly hard-pressed sectors, such as retail, hospitality and leisure.”

Earlier this week, Ms Reeves hit out at “too many leaks” in the run-up to Budget when questioned by a committee of MPs.

Shadow chancellor Sir Mel Stride said the latest GDP blow was “a direct result of Labour’s economic mismanagement”.

He said: “For months, Rachel Reeves has misled the British public. She said she wouldn’t raise taxes on working people – she broke that promise again. She insisted there was a black hole in the public finances – but there wasn’t.”

SNP Economy spokesperson Dave Doogan said: “Broken, Brexit Britain is lurching from crisis to crisis, stuck in a never-ending doom loop under the Labour Party where things keep going from bad to worse.

"Voters were promised change but instead Keir Starmer has presided over a record of failure - with the cost of living soaring, UK unemployment rising, poverty at record levels, the UK economy downgraded and public finances in a complete mess on his watch.

“Scotland is energy rich yet we are tied to an isolated UK state in terminal decline where the economy has grown just once in seven months - our future lies in rejoining our neighbours in the EU and building a prosperous, modern country through a fresh start with independence.”

A UK Treasury spokesperson said: “We are determined to defy the forecasts on growth and create good jobs, so everyone is better off, while also helping us invest in better public services.

“That is why the Chancellor is taking £150 off energy bills, protecting record investment in our infrastructure, and we are backing major planning reforms, the expansion of Heathrow and Gatwick airports, and the construction of Sizewell C.”

Economists said the weaker-than-expected figures would reinforce hopes of an interest rate cut by the Bank of England next week in what would be a welcome pre-Christmas boost to households.

In the three months to October, the economy shrank by 0.1% after growth of 0.1% in the three months to September, according to the ONS.

Many businesses have recently indicated that activity in the economy slowed in the lead-up to the Budget as speculation over possible tax measures grew.

Barret Kupelian, chief economist at PwC, said: “Some of this weakness still reflects the cyberattack on Jaguar Land Rover, which knocked car output earlier in the autumn, but the bigger story is that speculation around the autumn Budget kept households and businesses in wait-and-see mode.

“Given the timing of the Budget, November’s GDP print is likely to look similarly subdued before any post-Budget effects start to show up.”

Some experts have said weak recent growth was largely driven by rampant speculation in the run up to the Budget.

Former Bank of England chief economist Andy Haldane said last month the prolonged worries over the Budget and leaks over possible tax hikes had “caused businesses and consumers to hunker down”.

A Scottish Government spokesperson said: “Decisions on non-domestic rates for 2026/27 will be set out in the Scottish Budget in January.

“Economic growth is at the heart of the Scottish Government’s agenda and we will continue to work closely with business to pursue investment, build export potential, and capitalise on Scottish innovation. We are making progress, as shown by the CBI report showing business investment at a 20-year high in Scotland, whilst it falls in the rest of the UK.”