Britain’s economy grew unexpectedly in August, official figures showed on Thursday, offering a modest boost to the Labour government ahead of its budget announcement on October 28.
Gross domestic product (GDP) increased by 0.1 per cent from July, according to the Office for National Statistics (ONS), outperforming economists’ expectations for a 0.1 per cent contraction. However, growth slowed from the 0.4 per cent expansion recorded in July.
The figures provide some encouragement for the government as it prepares to make difficult financial decisions amid rising inflation, elevated borrowing costs and pressure to ease the cost of living.
Finance Minister John Healey is expected to outline the government’s budget plans later this month. He has pledged to maintain strict fiscal discipline as government bond yields remain near multi-decade highs, but has not confirmed whether the budget will include additional tax increases to help reduce public debt.
Economists have warned that higher oil and gas prices could push inflation upwards towards the end of the year, increasing pressure on households and businesses. The continuing conflict involving Iran and the wider Middle East has added uncertainty to the energy price outlook.
“We still expect the coming rise in inflation to dampen growth, but the economy is more robust than we thought,” Paul Dales, chief UK economist at Capital Economics, said.
The ONS reported that GDP expanded by 0.7 per cent in the three months to the end of August, indicating that overall economic activity continued to grow despite the weaker monthly performance.
Liz McKeown, the ONS director of economic statistics, said computer programming was once again the largest contributor to growth over the three-month period. Spending connected to the artificial intelligence sector also helped support economic activity in July.
Dales said the economy was showing signs of divergence, with some businesses performing well, partly because of AI-related spending, while households were becoming more cautious about their finances.
Samuel Edwards, head of client portfolio management at financial services firm Ebury, said the outlook remained uncertain, pointing to the International Monetary Fund’s more subdued projections for the UK economy in 2027.
Edwards warned that higher energy prices linked to the Iran conflict could revive inflation and potentially force the Bank of England to raise interest rates further. Such a move would add to borrowing costs for households and companies.
He also cautioned that the prospect of tax increases in the autumn budget could weaken consumer confidence, prompting households to cut spending and businesses to delay investment.
Edwards said companies should strengthen their financial resilience by controlling costs, maintaining access to financing and using foreign exchange hedging to manage currency risks during periods of market volatility.
While August’s growth exceeded expectations, the figures suggest Britain continues to face significant challenges as the government seeks to support living standards while keeping public finances under control.
