The U.K. economy returned to growth in August after two months of stagnation, providing a slight boost as the Labour government prepares to deliver its first budget later this month. According to flash figures published by the Office for National Statistics on Friday, the economy grew by 0.2% on a month-on-month basis, meeting economists’ expectations. This growth followed a period of economic flatlining in June and July, following modest but steady expansion in almost every month this year. The U.K. emerged from a shallow recession at the beginning of the year.
Over the three months to August, Britain’s economic growth expanded by 0.2%, compared to the 0.5% growth recorded in the three months to July. ING’s Developed Markets Economist James Smith noted that the economy had a strong start in the first few months of 2024, but recent figures show that this strength was short-lived. He predicted a 0.2% growth in the third quarter overall, indicating a slower pace compared to the first half of the year.
Following the release, Sterling rose slightly against the U.S. dollar, trading up 0.05% at $1.3067 by 8:56 a.m. London time. The U.K. government bond yields also decreased, with the 10-year trading around 4.211%, after a recent sharp climb. The services sector in the U.K. showed slight growth of 0.1% in August, while production and construction output rose by 0.5% and 0.4%, respectively.
Finance Minister Rachel Reeves welcomed the data, emphasizing that returning the economy to growth is the government’s top priority. Reeves, who leads the new Labour administration voted into power in July, is set to deliver her Autumn Budget at the end of the month. Tax hikes and spending cuts are expected as she addresses an estimated £22 billion ($29 billion) deficit in public finances. The Conservative opposition party, which governed until earlier this year, disputes the existence of this gap.
ING’s Smith suggested that the Treasury may not have the fiscal headroom it hoped for due to the slower growth in the second half of the year. The government aims to bring about “national renewal” to boost public morale after painting a bleak economic picture. Investment strategist Lindsay James from Quilter Investors highlighted the challenge facing Reeves in balancing fiscal decisions to avoid stifling economic growth, especially as interest rates decline. She cautioned against overcorrection at the expense of economic prosperity.
