The UK economy grew by 0.1 per cent in August, defying forecasts of a contraction, according to official ONS statistics. The unexpected growth was buoyed by a surge in the production sector, despite a broader slowdown across the nation.
GDP rose by 0.1 per cent in August after several months of robust expansion. Economists polled by Bloomberg had forecast a 0.1 per cent contraction for August.
Production drives growth while services stagnate
The figures were propelled by 0.8 per cent growth in the production sector. However, services — the country's dominant sector — recorded no increase in activity, while construction declined by 0.2 per cent.
Across a three-month period, the UK economy expanded by 0.7 per cent, as reported by City AM.
"GDP growth showed further strength in the latest three months," said Liz McKeown, director of economic statistics at the ONS.
"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."
"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."
Chancellor faces Budget pressure
The latest figures appear to signal the end of a strong growth run for the UK economy at a pivotal moment for Chancellor John Healey, just a fortnight before a challenging Budget in which his fiscal headroom is thought to have tightened considerably. The Bank of England could also put further pressure on momentum, with its Monetary Policy Committee widely anticipated to hike interest rates in November.
Statisticians confirmed that growth in July reached 0.4 per cent, comfortably exceeding market expectations at the time. While the July estimate remained unchanged, the figure for June was revised upwards by 0.1 percentage point.
The ONS also released robust data for the first two quarters of the year. The economy expanded by 0.6 per cent in the opening three months, while GDP growth of 0.5 per cent was recorded in the second quarter.
Yael Selfin, chief economist at KPMG, warned that households now faced "renewed pressure from rising wholesale natural gas prices and higher long-term interest rates", which would weigh on activity in the months ahead.
"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.
Warnings over tax rises and household pressure
Healey has been warned against undermining the economic momentum witnessed in the first half of the year by pushing through sweeping tax increases at the Budget. Lord Jim O'Neill, the former Goldman Sachs executive and ally of Andy Burnham, warned that any tax rises announced at the Budget "needs to be really thought through more carefully than before".
He suggested the UK economy could be on course for two per cent annualised growth, buoyed by a robust performance in the first half of the year — a level not witnessed since the eve of the 2008 financial crisis.
Business leaders have also urged the Chancellor to prioritise reducing hiring costs and cutting energy bills as part of his ambitions to re-industrialise Britain.
Burnham and Healey told executives on Tuesday that they intended to make the UK the "most pro-business country in the world", with discussions amongst attendees largely focusing on youth unemployment.
Paul Dales, chief UK economist at Capital Economics, noted that while businesses were faring well, households were "becoming more circumspect" in light of weaknesses 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.
