UK economy forecast to shrink 0.1% ahead of Budget

The UK economy is forecast to have contracted by 0.1% in August, reversing part of its summer expansion ahead of this month's Budget. GDP figures due on Thursday will show whether the stronger growth recorded in June and July continued.

The estimate comes from economists surveyed by Bloomberg, as reported by City AM. Separate forecasts from Pantheon Macroeconomics and RSM also point to a 0.1% monthly decline.

What happened

Robert Wood, chief UK economist at Pantheon Macroeconomics, expects weaker output across the main parts of the economy. He identifies professional services, administration, and information and communication as particular areas of weakness after their strong July performance.

Those three service industries together represent 19.7% of GDP. Their size makes the extent of any August reversal an important factor in the overall growth figure.

The projected contraction would leave policymakers preparing the Budget against a weaker monthly economic reading. Businesses are already seeking changes to the tax environment, with retailers pressing for Budget tax relief.

The background

GDP rose by 0.3% in June and 0.4% in July, exceeding expectations. Record temperatures supported hospitality activity, while artificial intelligence provided a lift to services industries.

Wood said the three service sectors he highlighted had registered their strongest monthly expansion since April 2022. His August assessment centres on how much of that unusually strong increase subsequently fell away.

The weather-related boost to hospitality sits alongside a separate concern for operators: research putting the sector's tax burden at 82p for every £1 of profit.

What people are saying

Thomas Pugh, chief economist at RSM, expects conditions beyond the summer to become more challenging. He forecasts inflation reaching around 4.5% early next year and unemployment moving back above 5%.

Pugh also expects Budget uncertainty to weigh on the fourth quarter. Taken together, he believes those pressures will sharply reduce growth towards the end of the year and leave the economy with a weak start to 2027.

The inflation outlook has prompted economists to forecast as many as four Bank of England interest rate increases by next summer. Oxford Economics said earlier this week that a November increase was looking increasingly likely; that remains a forecast rather than an announced policy decision.

What happens next

Thursday's GDP release will test the August contraction forecasts and provide the next reading on economic activity before the Budget. The figures have not yet confirmed either the expected overall decline or the anticipated weakness in services.

The Budget's tax decisions also remain ahead, with the wider debate including warnings against an increase in capital gains tax. For interest rates, November is the next point specifically identified in the forecasts, with the projected path of inflation central to economists' expectations.