The UK economy grew a better-than-expected 0.1% in the month to August, with output growth offsetting weak output in services and construction. Economists polled by Reuters expected GDP to contract 0.1% between July and August. But the reading still marked a slowdown in momentum for Britain’s gross domestic product, which grew 0.4% month-on-month in June and July. Output grew by 0.8%, the UK’s Office for National Statistics said in a statement on Thursday, while services showed no growth and construction fell 0.2% in August. In annual terms, GDP grew 2.1% in August, exceeding economists’ expectations of 1.7%. The ONS said it marked the highest year-on-year GDP reading since August 2022. Sterling jumped 0.4% against the US dollar following the release, while yields on UK government bonds, known as gilts, fell across the curve. The benchmark 10-year bond yield was last seen trading 9 basis points lower at 5.3364%. The UK, a net energy importer, is currently grappling with a cost of living crisis caused by persistent inflation and rising energy costs in the wake of the Russia-Ukraine war and the Iran war. The government will release its closely watched autumn budget later this month. He is tasked with sticking to the previous government’s so-called fiscal rules aimed at reining in public debt while delivering on promises to soften the blow of rising consumer costs. Analysts said slowing growth added to the pressure facing UK Chancellor John Healey as he prepares to present his first budget on October 28. Joe Nellis, head of economic research at accounting firm MHA, said in a note that the slowing economy will weigh on Healey’s “room for fiscal freedom” – the amount of room the government has to increase spending or cut taxes. “While continued economic growth should provide some support to tax revenues, the economy remains fragile. Rising debt interest costs have severely limited fiscal space, and long-term government borrowing costs remain exceptionally high,” it said. He added that any decision to raise taxes to balance the books “carries considerable risks,” threatening to weaken consumer spending, undermine confidence and discourage corporate investment. But at the same time, Nellis said, significant unfunded spending commitments could disrupt financial markets and increase government borrowing costs. Scott Gardner, investment strategist at JP Morgan Personal Investing, said in a note following the ONS release that while it was positive to see the economy continuing to grow despite global challenges, the outlook for the rest of the year “remains uncertain with a challenging autumn budget ahead.” “The UK’s debt has increased over the last year. Many will be nervously awaiting what the Chancellor announces,” he said. Sanjay Raja, chief economist at Deutsche Bank in the United Kingdom, struck a more optimistic tone. “While we are not seeing any dramatic course correction (so far), there are signs that the engine of the UK economy is slowing from its torrid pace in the first half of the year,” he said, noting that the consumer-facing services, construction and IT sectors fell from the previous month. But while he said there will “no doubt… be some setbacks in the run-up to the end of the year” as energy prices continue to hit household incomes and higher interest rates weigh on spending and investment, Raja argued that “the UK’s story of resilience continues”. “It is difficult to overstate how strong the UK’s performance has been throughout the year,” Raja said. “The UK economy remains the fastest growing G7 economy. What’s more impressive? If HMRC employment data is to be believed, UK GDP growth hit 1.8% in the first eight months of the year, with 95,000 FEWER jobs. Who said productivity growth was dead in the UK?”
