UK economy rebounds partially in August driven by services output

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The UK economy rebounded partially in August in line with economists’ expectations, driven by a recovery in the services sector, according to official figures.

Gross domestic product was up 0.2 per cent in August compared with the previous month, according to data published by the Office for National Statistics on Thursday.

The rise followed a sharper contraction of 0.6 per cent in July when economic activity was largely disrupted by strike action and wet weather.

The figures suggest the economy, which expanded in the past three quarters but remains under pressure from high inflation and borrowing costs, could struggle in the coming months.

“The economy entered a broad-based slowdown in late summer, which has deteriorated further in recent months,” said Yael Selfin, chief economist at the consultancy KPMG UK.

“The UK economy continues to feel the strain from elevated prices and high interest rates, with the full impact of past tightening still to be felt,” she added.

In August, the economy was smaller than its 2022 peak last May, indicating the persistent effect of high inflation and borrowing costs on UK output.

On Thursday, Bank of England rate-setter Swati Dhingra told the BBC that high interest rates were damping growth, affecting the lives of the young and more vulnerable people in particular.

“The economy’s already flatlined. And we think only about 20 per cent or 25 per cent of the impact of the interest rate hikes have been fed through to the economy,” she said.

Dhingra, who has voted against further rate increases since joining the Monetary Policy Committee in August 2022, also noted that, like high inflation, “interest rates will also typically impact younger, less educated people more”.

The BoE held interest rates at 5.25 per cent, signalling the peak of borrowing costs after almost two years of rate rises.

Further signs of the impact of high borrowing costs on the economy came on Thursday from the Bank of England’s credit condition survey, a quarterly survey of banks and building societies.

It showed the proportion of lenders reporting an increase in household defaults on mortgages over the past three months minus those reporting a decrease, rose to 43 per cent, the highest since the second quarter of 2009.

Default expectations for the next three months were even higher.

Sanjay Raja, economist at Deutsche Bank, said he expected “growth to turn sluggish through the next few quarters with the UK economy walking a fine line between recession and stagnation”.

Services output rose 0.4 per cent in August 2023 and was the main contributor to GDP growth, spurred by the professional services and education sectors.

Education activity was disrupted in July due to walkouts by teachers across the country leading to school closures.

Samuel Tombs, economist at Pantheon Macroeconomics, said the muted rebound in August reflected increased output in the education and health sectors as strike disruption receded, “rather than underlying momentum” in the wider economy.

Output in consumer-facing services, such as entertainment, bars and restaurants, fell 0.6 per cent in August and remained 4.3 per cent below its February 2020 levels, before the Covid-19 pandemic.

Kitty Ussher, chief economist at the Institute of Directors, said the fallback showed that “recent interest rate rises are causing households to budget carefully in the face of rising mortgage costs”.

Manufacturing output was down 0.8 per cent in August, while construction registered a 0.5 per cent fall. This marked a continuation of the contraction of the previous month.

More timely business surveys, such as the purchasing managers’ index, forecast further downturns in manufacturing and construction output in September.