UK economy grows 0.1% in August as production beats forecasts

The UK economy grew by 0.1% in August, defying forecasts of a contraction as a rise in production offset falling construction output and stalled services activity, official figures show.

Growth nevertheless slowed from July’s 0.4%, leaving Chancellor John Healey facing a loss of momentum two weeks before a Budget at which his room for manoeuvre is believed to have narrowed. The figures and business reaction were reported by City AM.

What happened

Production output increased by 0.8% in August, providing the main support for the monthly expansion. Services, the largest part of the economy, recorded no growth, while construction activity fell by 0.2%.

The GDP result was 0.2 percentage points above the 0.1% contraction anticipated by economists. It meant the economy avoided the decline flagged in forecasts ahead of the Budget, although growth was substantially weaker than in July.

Across the latest three-month period, output increased by 0.7%. That measure captured stronger activity earlier in the summer, rather than just the more subdued August performance.

The Office for National Statistics left its estimate of July’s overall GDP growth unchanged at 0.4%. It raised June’s growth estimate by 0.1 percentage point, strengthening the picture of economic activity before August’s slowdown.

The background

The economy had already recorded growth in both opening quarters of the year. GDP rose by 0.6% in the first quarter and by 0.5% in the second, providing the backdrop to warnings against measures that could weaken that momentum.

Within services, upward revisions to growth in June and July helped support the latest three-month result. The absence of further growth in August therefore followed a stronger period for the sector, rather than three consecutive months of stagnation.

The ONS also identified a broader spread of strength in business-facing services when comparing the latest three months with the same period a year earlier. Computer programming was among the contributors, alongside legal services, research and development, and advertising.

That distinction between business demand and household activity is central to economists’ reading of the figures. The release showed an economy still expanding overall, but with its dominant sector no longer adding to output in the latest month.

What people are saying

Yael Selfin, chief economist at KPMG, warned that rising wholesale natural gas prices and higher long-term interest rates were putting households under renewed pressure. She expected those costs to weigh on activity over the coming months.

Selfin said that backdrop could encourage Healey to take a cautious approach to the Budget. Her suggested balance was to keep net borrowing falling as a share of GDP without introducing major tax rises.

Jim O’Neill, the former banking executive, also urged careful consideration of any tax increases. He suggested the strength of the first half could put the economy on an annualised growth rate of about 2%, a pace he associated with the period before the 2008 financial crisis. That was his assessment of the trajectory, not the monthly growth figure reported by the ONS.

Paul Dales, chief UK economist at Capital Economics, drew a contrast between businesses performing well and households becoming more restrained. He pointed to weakness in consumer-facing services as evidence of that divide.

Dales offered two possible explanations rather than a firm conclusion. Activity could be settling back after earlier support from the World Cup and unusually hot weather, or households could be reducing other purchases to accommodate higher fuel and utility bills.

Fuel costs also feature in separate September spending figures showing a 2% rise. Those spending figures concern a later month than the August GDP release and are distinct from the official output measure.

Business leaders, meanwhile, have urged the Chancellor to reduce hiring costs and energy bills to support his ambitions for British industry. Attendees at a meeting with Healey on Tuesday said youth unemployment was a focus of discussions.

What happens next

The Budget is the immediate policy test. Healey faces calls to protect growth while addressing constraints on the public finances, with the scale and composition of any tax changes still to be set out.

For smaller employers, the debate includes the costs attached to taking on staff. Separate proposals to expand rates relief to support small-firm hiring address that pressure, although the GDP report contains no announcement of such a measure.

A further decision follows in November, when the Bank of England is expected to raise interest rates. That expectation adds another potential restraint on activity after August’s slowdown, alongside the household cost pressures identified by economists.