UK economy returns to growth as Labour tees up all-important budget

LONDON — The U.K. economy returned to growth in August following two consecutive months of stagnation, providing a slight boost as the Labour government prepares to deliver its first budget later this month.

The economy grew 0.2% on a month-on-month basis, flash figures published by the Office for National Statistics showed Friday, meeting expectations of economists polled by Reuters.

It follows an economic flatlining in June and July after the U.K. recorded modest but steady expansion in almost every month this year. Britain emerged from a shallow recession at the start of the year.

Over the three months to August, Britain’s economic growth also expanded 0.2%, compared with the 0.5% recorded in the three months to July.

“The UK economy had a remarkable run through the first few months of 2024, at least if the monthly GDP figures are to be believed. But those same figures now show that this strength was short-lived,” ING’s Developed Markets Economist James Smith said in a note shortly after the release.

“The bottom line is that the economy still seems to be growing at a reasonable pace, but the 0.6/0.7% quarterly GDP readings we became accustomed to in the first two quarters of the year are not going to be repeated in the second half of the year. We’re looking for 0.2% growth in the third quarter overall.”

Sterling rose slightly against the U.S. dollar following the release, trading up 0.05% at $1.3067 by 8:56 a.m. London time. U.K. government bond yields, meanwhile, ticked lower, with the 10-year trading around 4.211%, having climbed sharply over recent days.

The U.K.’s dominant services sector showed slight growth of 0.1% in the month to August, while production and construction output rose by 0.5% and 0.4%, respectively.

Finance Minister Rachel Reeves welcomed the data, saying returning the economy to growth is the government’s “number one priority.”

“While change will not happen overnight, we are not wasting any time on delivering on the promise of change,” she said in a statement. The new Labour administration was voted into power in July during snap elections.

The reading comes as Reeves is set to deliver her Autumn Budget at the end of this month, with tax hikes and spending cuts expected as she tries to overcome an estimated £22 billion ($29 billion) black hole in the public finances. The Conservative opposition party, which led the country until snap elections earlier this year, deny the gap.

ING’s Smith said that if the U.K. Treasury was hoping the strong growth in the first half of the year would unlock some “extra fiscal headroom” in the budget, “it is likely to be left disappointed.”

“Remember the key here is what the Office for Budget Responsibility projects for the UK economy. And like the BoE, they are unlikely to take much inference from the GDP figures so far this year. Indeed, if anything the OBR forecasts already sit at the more optimistic end of the spectrum,” he added.

The government is pitching its vision for an era of “national renewal,” as it attempts to inject some optimism into the public psyche after painting a gloomy picture of the state of the economy.

Lindsay James, investment strategist at Quilter Investors, said Reeves faces a “tricky balancing” to ensure her decisions don’t stifle further economic growth.

“With interest rates beginning to fall, the responsibility has shifted from the Bank of England to Rachel Reeves, who must now make critical fiscal decisions. She and the Prime Minister have indicated that ‘pain’ is necessary for future prosperity, but there is a real risk of overcorrection at the expense of economic growth,” she said.