UK August GDP growth surprises with resilience despite sectoral slowdown

The UK economy grew by 0.1% in August 2024, beating economists' expectations of a 0.1% contraction. Annual GDP growth picked up to 2.1%, the fastest rate since December 2019 excluding the pandemic rebound period and exceeding forecasts of 1.7%. This followed a 0.4% month-on-month expansion across June and July.

Sectoral Divergence

Growth was driven by a strong performance in production and tech sectors, while other areas showed weakness. The production sector grew 0.8% month-on-month, with manufacturing surging 1.2%. Computer programming grew 1.1% and was the largest contributor to growth in the three months to August. In contrast, the services sector was flat, narrowly beating forecasts for a 0.1% dip. The construction sector declined by 0.2%.

Output in the wider information and communications sector has increased sharply in Britain compared to European peers so far in 2024.

Economic Context and Risks

The growth comes amid a cost-of-living crisis sparked by sticky inflation, surging energy costs linked to conflicts in Ukraine and the Middle East, and high interest rates. As a net energy importer, the UK faces renewed pressure from rising wholesale natural gas prices. The International Monetary Fund warned that higher energy prices and rising long-term interest rates are likely to weigh on UK growth in 2025, though it recently revised its 2024 growth forecast up to 1.3% from 1.0%.

Yael Selfin of KPMG noted that households now face renewed pressure from rising wholesale natural gas prices and higher long-term interest rates, which could weigh on activity over the coming months. Sanjay Raja, chief UK economist at Deutsche Bank, said there are signs that the engine of the UK economy is slowing from its torrid pace in the first half of the year. He noted consumer-facing services, construction and the IT sectors all slipped from the previous month.

Policy and Market Implications

The data intensified pressure on Chancellor John Healey as he prepares to deliver his first Autumn Budget on October 28. Analysts said the slowdown adds to the fiscal challenge. The budget is tasked with sticking to the previous government's fiscal rules aimed at reining in public debt while aiming to soften the blow of surging consumer costs.

Joe Nellis, head of economic research at MHA, said the slowing economy will weigh on Healey's 'fiscal headroom'-the leeway to increase spending or cut taxes. He stated that rising debt interest costs have severely constrained this headroom, as long-term government borrowing costs remain exceptionally high. "While continued economic growth should provide some support for tax revenues, the economy remains fragile," Nellis said. He warned that any decision to raise taxes carries considerable risks, threatening to weaken consumer spending and discourage corporate investment.

Financial markets reacted to the GDP release. The British pound jumped 0.4% against the US dollar, while the yield on the benchmark 10-year gilt fell 9 basis points to 5.3364%. The data could also influence Bank of England policymakers as they weigh a potential interest rate decision next month, with third-quarter growth looking on course to exceed the Bank's forecast of 0.4%.

Despite the headwinds, some economists highlighted underlying resilience. Sanjay Raja argued that the UK's resilience story continues, stating, "The U.K. economy remains the fastest growing G7 economy." He said it's hard to overstate how strong the UK performance has been all year, with business investment, particularly for tech hardware, being an important driver, even if the UK still lags the US in scale. Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, said the outlook for the rest of the year remains uncertain with a tricky Autumn Budget ahead, and it's unclear what fiscal headroom will be left given the increased cost of servicing UK debt.

The government's Autumn Budget will be unveiled later this month, tasked with handling constrained fiscal headroom amid ongoing economic uncertainty.