By Andy Bruce and Suban Abdulla

(Reuters) – Britain’s economy shrank for a second month in a row in October in the run-up to the government’s first budget, marking the first back-to-back falls in output since the onset of the COVID-19 pandemic. This poses a setback for new finance minister Rachel Reeves.

Gross domestic product (GDP) contracted by 0.1% month-on-month in October, mirroring the decline seen in September, according to the Office for National Statistics (ONS). This represents the first consecutive drop in monthly GDP since March and April 2020, when Britain enforced its initial coronavirus lockdown.

Economists polled by Reuters had anticipated a monthly expansion of 0.1%.

The ONS mentioned “mixed” anecdotal evidence from companies regarding turnover, as many awaited the budget statement that imposed significant tax increases on businesses, while some accelerated their activities.

The services sector remained flat, while output in manufacturing and construction industries dropped based on October’s data, which reflect the economy in the weeks leading up to Reeves’ budget statement on October 30.

Reeves and Prime Minister Keir Starmer, who emphasized stronger economic growth as the focal point of the Labour Party’s election campaign this year, had anticipated that the budget would entail painful tax hikes.

Friday’s data further contributes to a series of disappointing figures for the British economy, with business surveys and retail sales also performing below expectations.

“While the figures this month are disappointing, we have instituted policies aimed at delivering long-term economic growth,” Reeves stated.

The opposition Conservatives argued that the growth outlook faces serious challenges due to Labour’s initial actions in governance. “It’s no surprise that businesses are raising alarms,” said Mel Stride, the Conservatives’ spokesman on the economy. “This fall in growth highlights the stark effects of the Chancellor’s decisions and the continuous negative narrative on the economy.”

The National Institute of Economic and Social Research, a prominent think tank, projected the economy would stagnate in the fourth quarter of 2024. However, many forecasters believe that the budget’s boost to public investment and spending will result in faster economic growth in 2025, though business groups express concerns about employers coping with higher social security contributions.

Consumer confidence saw a modest rise in December according to a survey released on Friday, providing Reeves with a small source of reassurance amidst a wave of negative business surveys.

Following the GDP data release, the pound dropped by over a third of a cent against the U.S. dollar before partially recovering. Investors continued to anticipate around three quarter-point cuts in Bank of England interest rates by the end of next year.

Paul Dales, chief UK economist at consultancy Capital Economics, indicated that the Bank of England is unlikely to be significantly alarmed by the GDP data to warrant a rate cut at its Thursday meeting. “However, our confidence around that has diminished since this data release,” he added.

Last month, the Bank of England lowered its annual growth forecast for 2024 to 1% from 1.25% but predicted a stronger growth of 1.5% for 2025, reflecting a short-term economic boost from Reeves’ budget.

Since the pandemic, Britain’s economic output has progressed slowly. Among major advanced economies, only Germany, heavily impacted by surging energy costs following Russia’s invasion of Ukraine, fared significantly worse.

Additionally, separate ONS trade data indicated that goods imports and exports fell in October, with exports to the European Union surpassing those to the rest of the world for the first time in nearly a year.