The UK economy grew unexpectedly in August, defying forecasts, as output expanded by 0.1 per cent on the back of a 0.8 per cent rise in the production sector, according to figures published by the Office for National Statistics. A Bloomberg poll of economists had predicted a contraction of 0.1 per cent for the month, making the outcome a surprise. City AM has the full report on this story.
Services, the largest sector in the UK economy, recorded no growth in August, while construction contracted by 0.2 per cent. Over the latest three-month period, however, GDP expanded by 0.7 per cent.
ONS points to revised services data driving quarterly strength
Liz McKeown, economic statistics director at the ONS, said the three-month picture remained robust. ‘GDP growth showed further strength in the latest three months,’ she said. ‘Upward revisions to already strong services growth in June and July helped drive robust growth across the three months, despite services showing no growth in August.’
McKeown added that the longer-term picture showed services strength spread across a range of industries. ‘Looking at the longer-term picture, compared with the same three-month period a year ago, the increased strength now seen is services is evident not just in computer programming but across a range of business-facing industries, including legal services, research and development, and advertising,’ she said.
Growth in July was recorded at 0.4 per cent, which the ONS said exceeded market expectations at the time. The June figure was revised upward by 0.1 percentage point. For the first quarter of the year, GDP grew by 0.6 per cent, and the second quarter posted expansion of 0.5 per cent.
Budget pressure and household caution cloud the outlook
The August reading ends what had been a run of strong monthly growth figures, arriving two weeks before a Budget that Chancellor John Healey faces under constrained fiscal conditions. The Bank of England’s Monetary Policy Committee is also expected to raise interest rates in November, which could put further pressure on activity.
Yael Selfin, chief economist at KPMG, said households now faced ‘renewed pressure from rising wholesale natural gas prices and higher long-term interest rates’, which would weigh on spending in the coming months. ‘Against this backdrop, the Chancellor may feel inclined to take a cautious approach at the upcoming Budget, keeping net borrowing on a declining path as a share of GDP whilst avoiding major tax rises,’ she said.
Lord Jim O’Neill, the former Goldman Sachs executive and ally to Andy Burnham, cautioned that any tax rise at the Budget ‘needs to be really thought through more carefully than before’. He suggested the economy could be running at around two per cent growth on an annualised basis, given the strong performance in the first half of the year, which he said would put it at levels not seen since before the financial crisis in 2008.
Paul Dales, Capital Economics’ chief UK economist, noted that corporate performance had held up well even as households were ‘becoming more circumspect’ given weakness in consumer-facing services. ‘Some of those could just be further reversals of the earlier boosts from the World Cup and the unusually hot weather. Or it could be a sign that higher fuel and utility prices are prompting households to trim their spending on other items,’ Dales said.
Business leaders have separately called on Healey to prioritise reducing hiring costs and lowering energy bills as part of any push to re-industrialise Britain. The Chancellor and Burnham told business representatives they aimed to make Britain ‘the most pro-business country in the world’, with discussions at that meeting focusing on youth unemployment, according to attendees.
