UK economy expected to contract in August ahead of Budget

The United Kingdom economy is projected to have experienced a contraction in August, reversing the positive momentum observed in the preceding months. According to a poll of City economists conducted by Bloomberg, the latest gross domestic product data, scheduled for release on Thursday, is expected to indicate a decline of 0.1 per cent. This anticipated downturn contrasts with the stronger-than-expected growth recorded in June and July, which had raised hopes for sustained economic expansion.

The services sector, a critical component of the national economy, had enjoyed a robust start to the summer period. However, signs of a shrinking economy are expected to place additional pressure on Chancellor John Healey. He has been advised that difficult decisions will be necessary during this month’s Budget. The earlier growth in June and July was attributed to record temperatures benefiting the hospitality industry and a lift from artificial intelligence in services. Experts suggest that the positive economic start associated with Prime Minister Andy Burnham’s leadership may have faltered in the latest figures.

Robert Wood, chief UK economist at Pantheon Macroeconomics, predicts a 0.1 per cent decline, which is worse than the general City consensus. He anticipates weaker output across all main parts of the economy, with notable weakness in professional services, administration, and information and communication. These three service sectors account for 19.7 per cent of GDP and recorded their strongest monthly growth since April 2022 in July. Thomas Pugh, chief economist at RSM, also forecasts a 0.1 per cent decline and describes the economic outlook beyond the summer as more difficult. He notes that inflation is likely to rise to around 4.5 per cent early next year, while unemployment may trend back above 5 per cent. These factors are expected to slow growth sharply in the final quarter of this year and result in a slow start to 2027. Rising inflation could prompt the Bank of England to hike interest rates up to four times by next summer, with Oxford Economics stating that a November rate hike is becoming increasingly certain.