Official data revealed Chancellor Rachel Reeves' unexpected growth setback yesterday, which sparked concerns about a potential slump and caused the pound to decline.The Office for National Statistics (ONS) reported that the gross domestic product (GDP) decreased by 0.1% in October, which caused sterling to drop half a cent versus the dollar to slightly above $1.26, a two-week low. The value of sterling was slightly over €1.20, down more than half a cent against the euro.The decline in monthly GDP was the second in succession and the first time it has dropped for two months in a row since the pandemic era in 2020.

It added to the risk that the economy could shrink in the current fourth quarter of the year, economists said.

And with inflation expected to head higher over the coming months, fears were raised that Britain could be heading for so-called 'stagflation' – where the economy is stagnating while prices are spiralling. The latest GDP figures mean that the economy has only grown in one out of the first four months since Labour took office – and that GDP is 0.1 per cent smaller than when Reeves and Sir Keir Starmer entered Downing Street.Yet hopes that the economy's weakness might persuade the Bank of England to deliver a pre-Christmas interest rate cut at its final policy meeting next week remain unlikely to be fulfilled. Market expectations of a cut next Thursday edged up only marginally from around 10 per cent to 13 per cent.A survey by the Bank, which closely monitors the public's inflation attitudes, suggested that keeping inflation down still poses a challenge.

The survey found that the public see it rising to as much as 3 per cent over the coming year.

That was up from an expectation of 2.7 per cent in the previous survey three months ago and the first time it has risen since August 2023.October's GDP decline was widely blamed on uncertainty ahead of the Budget, which came at the end of that month.

But for many businesses, the policies announced by Reeves proved to be even worse than feared – especially her £25billion raid on employer National Insurance.Firms say that is likely to result in fewer jobs, lower pay, higher prices and less investment. That could mean, experts say, that the UK deteriorates even further – as recent business surveys already suggest it is doing.Thomas Pugh, UK economist at accountancy firm RSM, said: 'With the economy now having contracted for the second consecutive month, and inflation climbing back towards 3 per cent, there is a risk that the UK is slipping into stagflation territory.'

Pugh said he expected the economy to 're-accelerate into 2025' now that the Budget has passed. But Sanjay Raja, chief UK economist at Deutsche Bank, said: 'There's probably more bad news on the horizon.

'The risk of a negative quarterly growth print just went up.'

Paul Dales, chief UK economist at Capital Economics, said the likelihood of growth returning in November or December was 'far from a given'.

Isaac Stell, investment manager at Wealth Club, said: 'With more companies stating they will cut back on hiring and investment to deal with the rising costs related to the Budget, the question will be, where will growth actually come from?'