The UK economy grew 0.2% in August following two months of stagnant growth, but markets continue to predict a slower growth rate in the second half.
The Office for National Statistics said services was the main contributor to growth in the three months to August, rising by 0.1%. There was also a 1% increase in construction output, but production output showed no growth over this period.
While commentators said the news will provide a “sigh of relief” for the new Labour government after a difficult start to their administration, gloom continues to surround the economy as markets await the outcome of the Budget later this month.
Lindsay James, investment strategist at Quilter Investors, said: “Despite the UK experiencing better-than-expected growth this year and upward revisions in economic forecasts, the gloom surrounding the economy has been hard to shake. Much of this is due to Labour’s rhetoric as they attribute difficult tax and spending decisions to their predecessors. Additionally, bond yields have risen recently as debt continues to grow and inflationary threats persist.
“Until there is clarity from this month’s Budget, consumer and business confidence will likely remain muted, delaying any economic boost from these better GDP numbers.”
Luke Bartholomew, deputy chief economist at abrdn, echoed the sentiment: “The economy was always likely to slow somewhat over the second half. But the worry is that speculation about the upcoming Budget will cause an even more pronounced slowdown.
“With the Bank of England set to cut rates again in November, the key question remains whether the combination of the Budget and the so-far modest economic slowdown will be enough to see the Bank speed up the pace of rate cuts in line with what the Fed and the ECB are doing.”
There has been growing speculation that Chancellor Rachel Reeves could announce changes to pensions, capital gains tax and inheritance tax in the Autumn Budget as Labour seeks to plug the £22 billion black hole in government finances. However, with economic growth expected to be sluggish in the second half, Dani Hewson, head of financial analysis at AJ Bell, said Reeves “must feel the weight of responsibility” as she tries to balance the government books and deliver the incentives needed to enable growth at the same time.
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