Sluggish UK economy stages only partial bounceback in August

The last time the economy shrank by more than that in a month was in June 2022, impacted by a one-off holiday to mark the late Queen Elizabeth's 70 years on the throne.

The ONS said the economy would need to grow by 0.2 per cent in September to avoid contracting in the third quarter, excluding other factors. (Image credit: Reuters)

Britain's economy partially recovered in August after a sharp drop in July but the bigger picture remained one of only sluggish growth after last year's surge in inflation and 14 back-to-back interest rate hikes by the Bank of England. Official data showed the economy expanded by 0.2 per cent in August from July, in line with a Reuters poll of economists. But July's slide, compounded by rainy weather and strikes by teachers and other workers, was revised to 0.6 per cent from an initial estimate of a 0.5 per cent decline.

The last time the economy shrank by more than that in a month was in June 2022, impacted by a one-off holiday to mark the late Queen Elizabeth's 70 years on the throne. The International Monetary Fund this week forecast Britain would be the slowest-growing Group of Seven nation in 2024. The signs of a slowdown prompted the BoE to halt its run of interest rate increases last month.

"The UK economy is holding up but remains in a precarious state," said David Bharier, head of research at the British Chambers of Commerce. "Our research is clear about the issues UK firms are facing - three years of economic shocks, high inflation and interest rates, skills shortages, and trade barriers with the European Union."

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The data showed consumer-facing services remained more than 4 per cent below their level before the pandemic, with the biggest drag being the home rentals sector which has been hit by rising interest rates and other cost increases.

Nonetheless, August's growth reduces the possibility of a recession starting as early as the July-September period.

The ONS said the economy would need to grow by 0.2 per cent in September to avoid contracting in the third quarter, excluding other factors. While July's output was revised down, monthly growth in June was revised up by 0.2 percentage points to 0.7 per cent. The data showed Britain's huge services sector grew by a slightly stronger than expected 0.4 per cent in August from July while manufacturing and construction shrank by 0.8 per cent and 0.5 per cent.

Over the three months to August, the economy grew by 0.3 per cent, a performance the ONS described as modest and helped by car manufacturing and sales as well as construction. Investors are putting a chance of less than one in four on the BoE resuming its rate hikes after its next scheduled meeting in November. Finance minister Jeremy Hunt has come under pressure to cut taxes or offer other support measures to voters when he delivers a budget update speech on Nov. 22, with the opposition Labour Party leading opinion polls and an election likely next year.

Hunt said Thursday's figures showed the British economy was fundamentally resilient. "But we still need higher growth, which means winning the battle against inflation, unlocking supply side measures, and being prudent in the face of global instability," he said. A survey published earlier on Thursday showed the housing market was stuck in the doldrums in September although the halt in the BoE's run of rate hikes raised hopes of a return to growth in sales in a year's time.

A survey published earlier this week showed consumers were holding off on much of their non-essential spending as rising motor fuel prices added to the broader cost-of-living squeeze. Britain's economy stood 2.1 per cent bigger than in February 2020, just before the pandemic hit, the ONS said. The agency recently revised up its estimate of output since the pandemic, putting Britain's recovery in the middle of the pack among similar economies and no longer the laggard.

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UK economy Economy Bank of England