UK economy grew 0.1% in August, beating expectations

The U.K. economy grew by a better-than-expected 0.1% in the month to August, with production growth offsetting weak output in services and construction.

Economists polled by Reuters had been expecting GDP to shrink by 0.1% between July and August. But the reading still marked a slowdown in momentum for British gross domestic product, which grew by 0.4% month-on-month in June and July.

Production grew by 0.8%, the U.K.’s Office for National Statistics said in a release on Thursday, while services showed no growth and construction fell by 0.2% in August.

On an annual basis, GDP grew by 2.1% in August, beating economists’ expectations of 1.7%. The ONS said it marked the highest year-on-year GDP reading since August 2022.

The British pound jumped 0.4% against the U.S. dollar following the release, while yields on U.K. government bonds — known as gilts — fell across the curve. The yield on the benchmark 10-year gilt was last seen trading 9 basis points lower at 5.3364%.

The U.K., a net energy importer, is currently grappling with a cost-of-living crisis sparked by sticky inflation and surging energy costs in the wake of the Russia-Ukraine war and the Iran war.

The government will unveil its closely watched Autumn Budget later this month. It’s tasked with sticking to the previous government’s so-called fiscal rules aimed at reigning in public debt while delivering on promises to soften the blow of surging consumer costs.

Analysts said the slowdown in growth added to pressure facing U.K. finance minister John Healey as he prepares to deliver his first budget on Oct. 28.

Joe Nellis, head of economic research at accountancy firm MHA, said in a note that the slowing economy will weigh on Healey’s “fiscal headroom” – the amount of leeway the government has to either increase spending or cut taxes.

“While continued economic growth should provide some support for tax revenues, the economy remains fragile. Rising debt interest costs have severely constrained fiscal headroom, with long-term government borrowing costs remaining exceptionally high,” he 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 unsettle financial markets and push government borrowing costs higher.

Scott Gardner, investment strategist at J.P. 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 tricky Autumn Budget ahead.”

“It’s unclear right now what fiscal headroom will be left given the servicing of UK debt has increased over the last year. Many will be waiting nervously to see what the Chancellor announces,” he said.

Sanjay Raja, chief U.K. economist at Deutsche Bank, struck a more optimistic tone.

“While we aren’t seeing any dramatic course correction (so far), there are signs that the engine of the U.K. economy is slowing from its torrid pace in the first half of the year,” he said, noting that consumer-facing services, construction and the IT sectors all slipped from the previous month.

But while he said there would “undoubtedly… be some hiccups to come in the run up to year end” as energy prices continue to bite into household incomes and higher interest rates drag on spending and investment, Raja argued that “the U.K.’s resilience story continues.”

“It’s hard to overstate how strong the U.K. performance has been all year,” Raja said. “The U.K. economy remains the fastest growing G7 economy. What’s more impressive? If you believe the HMRC jobs data, U.K. GDP growth hit 1.8% in the first eight months of the year, with 95k FEWER jobs. Who said productivity growth was dead in the U.K.?”