UK economy posts meagre 0.1% growth in August as ‘pre-budget funk’ hits services sector – business live

Rolling coverage of the latest economic and financial news, including the latest UK growth reportBritain’s services and construction sectors have been hit by a “pre-budget funk”, warns Sanjay Raja, Deutsche Bank’s chief UK economist, amid uncertainty about Rachel Reeves’s fiscal plans.Following today’s GDP report showing there was no services growth in August, while construction fell by 0.3%, Raja explains:Industrial production expanded by 0.4% m/m, led in large part by stronger manufacturing growth (0.7% m/m). The bad news? Both the services and construction sectors have hit a pre-Budget funk.The services economy was unchanged for a second consecutive month – this time, led by weaker transport and storage activity as well as weaker retail activity (particularly from lower new car registrations) and leisure services.To be sure, the economy is now running at a lower gear after a strong start to the year….We expect some turbulence to continue as we approach year-end. Indeed, the UK economy has yet to see the full ramifications of the US trade war. Budget uncertainty is hitting its peak too – likely dampening discretionary household and business spending.“In the week that the International Monetary Fund gave the UK’s economic growth forecasts a small bump up, today’s GDP figures paint a picture of an economy stumbling to the end of the year after a strong start. Monthly GDP grew just 0.1%, giving a three-month rate of 0.3% - not exactly exciting figures. Markets will have been hoping for signs that the UK can maintain it’s early-year momentum but it appears that has now dissipated just as we approach a crunch Budget statement from the Chancellor. Rachel Reeves will need to find a tonic and quickly if she is to extricate the economy from its current malaise.“There are a number of obstacles coming down the track for the economy too. The IMF confirmed the UK has an inflation problem and is struggling to get out of it. That will continue to put pressure on the consumer. Meanwhile, both businesses and individuals are fearful of what is coming at November’s budget after Rachel Reeves confirmed tax rises are being looked at. Last year showed just how much impact that uncertainty can have on economic growth and now this year appears as if it will be no different.“This dishearteningly meagre return to growth will do little to allay fears over the wellbeing of the UK economy, with higher manufacturing output masking weaker activity in other sectors, notably services and construction.“August’s increase is unlikely to have triggered a noteworthy pickup in economic growth across the third quarter with higher inflation and free-falling business confidence expected to have restrained output in September.The meagre rise in real GDP in August suggests growth is still being hampered by high interest rates, higher taxes and soft overseas activity. With business sentiment on the floor and employment still falling, we doubt growth will improve much in Q4.“UK economic growth is set to be muted in the next few quarters with private sector activity facing a damaging mix of external pressures, alongside increasing trepidation amid firms and consumers ahead of yet another difficult budget event. The latest short-term indicators suggest an end to the recent upward drift in the 2025 growth projection.“We expect UK real GDP growth to stand at 1.4% in 2025 and 1.0% in 2026. Despite persistent growth concerns, still-elevated earnings growth and the prospect of headline inflation rising to 4% in September are likely to rule out a further interest rate cut this year. The first-rate cut is expected to occur in February 2026 and the Bank rate to stand at 3.25% at the end of next year.” Continue reading...

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