The economy showed signs of life in August after flatlining in June and July, according to the latest UK GDP figures from the Office for National Statistics.
This will bring some light relief to the government as it gears up for the Autumn Budget, having previously declared economic growth to be its “national mission”.
The economy grew by 0.2% on a monthly basis. It also grew by 0.2% on a three-month basis, compared to the previous three-month period.
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While a return to growth is a step in the right direction, there is little cause for celebration as the rate of growth remains limp.
UK GDP has also experienced a slowdown compared to earlier this year. The economy grew by 0.7% in the first quarter of 2024 and 0.5% in the second quarter.
Michael Field, European equity strategist at Morningstar, describes the latest news as “clear evidence that the UK economy is simply plodding along”.
It comes after the UK dipped into a brief and shallow recession at the end of 2023. The economy quickly recovered but has been churning out barely positive growth figures since.
Interest rates are currently at 5% in an effort to keep inflation under control, but high borrowing costs are also putting the brakes on economic growth.
The Bank of England will be watching the latest GDP figures with interest as it gears up for its November rate-setting decision. Signs of weak growth could boost the argument for cutting rates again sooner rather than later.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, says the economy could “blow a bit hot and cold over the near term”.
He adds that the “lift to incomes from muted inflation is hindered by growing consumer and business caution amid global geopolitical uncertainty and probable tax hikes”.
What’s driving UK GDP?
Services output was the main contributor to growth in the three months to August, according to the ONS, despite rising by just 0.1%. Professional, scientific and technical activities all gave the sector a boost.
On a monthly basis, growth in the services sector was largely driven by accounting, bookkeeping and auditing activities.
Services account for around 80% of the UK economy, so it is an important area to watch. Field describes a 0.1% growth rate in the sector as “weak”.
Meanwhile, the construction sector recovered in August, growing 0.4% after falling by the same amount the month previously. “The growth in monthly output came from an increase in new work (1.6%), while repair and maintenance fell by (1.0%),” the ONS says.
Production output grew by 0.5% in August after falling by 0.7% in July 2024 (revised figure), but showed no growth at all on a three-month basis.
What do the latest UK GDP figures mean for interest rates?
The Monetary Policy Committee (MPC) is not due to meet this month, meaning there are just two more rate-setting meetings left this year. Households, borrowers and businesses across the country are desperately hoping for further interest rate cuts.
Although the UK economy returned to growth in August, it is unlikely to give the Bank of England cause for concern given the sluggish pace of that growth.
“The opinion remains that slowing growth could be the theme for the rest of the year, which leaves the likelihood of an interest rate cut in November in play,” says Richard Hunter, head of markets at Interactive Investor.
Investors are gearing up for at least one more interest rate cut in 2024, possibly two. It comes after governor Andrew Bailey said UK policymakers could become a “bit more aggressive” in their approach if inflation continues to cool.
The base rate is currently 5%, after being cut for the first time in over four years on 1 August.
If the MPC were to implement two more quarter-point cuts this year, one in November and another in December, that would bring the base rate to 4.5%.
Any potential rate cuts are not a done deal and will factor in the upcoming inflation and wage growth reports.
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