UK economy returns to growth in August with 0.2% expansion

UK, London, blurred motion of incidental business people walking to work with view of the financial district behind

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published 12 October 2023

The UK economy bounced back in August, with GDP rising by 0.2% in line with expectations.

The services sector was the biggest contributor, with growth of 0.4%. The economy was also boosted by the education sector, as it recovered from strike action.

However, other sectors fared poorly, such as the production sector, with a 0.8% fall in the manufacturing sub-sector. Construction also fell, down 0.5% as heavy rainfall delayed projects.

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The 0.2% expansion in the economy follows a worse-than-expected reading for July. Updated figures from the Office for National Statistics (ONS) show that the economy shrunk by 0.6%, more than the original estimate of a 0.5% fall.

HOW DID THE ECONOMY PERFORM IN AUGUST?

The biggest contributor to the expansion in GDP was the services sector. Within that sector, the largest drivers of growth were professional, scientific and technical activities, and education.

The ONS said: “Education grew by 1.6% in August, after a fall of 1.7% in July where there were two days of industrial action by teachers in England.”

The information and communication sub-sector also grew in August, by 0.9%. This was driven by computer programming, consultancy and related activities, which expanded by 2.4% in August after a fall of 3.1% in July.

However, the production sector contracted by 0.7%, and the construction sector also fell, by 0.5%.

Across the past three months, the economy has grown modestly, with GDP rising by 0.3% between June to August, and growth recorded in all sectors, particularly car manufacturing and sales, as well as construction.

DOES THIS MEAN WE’LL AVOID A RECESSION?

The 0.2% rise in GDP in August, following July’s 0.6% contraction, will raise hopes that the economy has escaped a recession.

Chancellor Jeremy Hunt sounded a bullish note, saying the UK had “grown faster than France and Germany since the pandemic”, and the data showed the economy was more resilient than expected.

Jonathan Moyes, head of investment research at Wealth Club, commented: “Whilst growth may be nothing to write home about, the economy does appear to be shaking off fears of a looming recession. Forecasters have long predicted a recession that has yet to arrive. The economy may continue to find a way to muddle through, despite the weather.”

However, other experts struck a more cautious note. Emma-Lou Montgomery, associate director for personal investing at Fidelity International, said: “The UK must still avoid negative readings in the remaining two quarters of the year if recession is to be averted, so these are early days yet, but the signs are positive, for now.”

She added that this week’s IMF report predicting that the UK will have the highest inflation and slowest growth next year of any G7 economy, falling behind the US, France, Germany, Canada, Italy and Japan, “will still be ringing in many people’s ears”.

“What happens to interest rates will undoubtedly play a part. If, as financial markets seem to think, the Bank of England base rate has peaked at 5.25%, then maybe the IMF’s predictions will look weaker. But if previous higher forecasts come true, then it’s a different story. Because the difference between 5.25% and the previous peak forecast of 6% would be substantial in terms of its economic impact.”

According to Hetal Mehta, head of economic research at St. James's Place, “monthly GDP has trundled sideways since the beginning of 2022”.

She warned that the full effect of the Bank of England’s rate hikes had yet to feed through, and that “credit conditions have been tightening and some softening in the UK labour market is evident – these will most likely keep the UK economy on a weak footing in the months ahead”.

The consultancy Capital Economics is forecasting a 0.2% contraction for both Q3 and Q4, which would mean the UK tips into a recession.

Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.

She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.

Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.