The UK economy returned to growth in August, expanding 0.1%, after output fell in July. A resurgence in manufacturing output uplifted the figure into positive territory in August after July’s revision to a 0.1% contraction. Looking ahead, we continue to expect GDP growth to slow to 0.2% for Q3 as a whole. This as the economy cools following further confidence-sapping speculation about the Autumn Budget. While growth will decelerate in the second half of 2025, the UK economy has been growing at potential so far this year. It means the Monetary Policy Committee (MPC) will watch and wait on interest rates into early 2026.

UK economy squeezed out some growth in August

The economy grew 0.1% in August, matching our forecast for the month. Meanwhile, July’s growth was revised down from stagnation (0%) to a 0.1% fall. The main contribution to growth in August came from the manufacturing sector, which grew 0.7% m/m as sectors that were weak in July bounced back. Indeed, pharmaceutical manufacturing made up roughly half of this growth after collapsing 3.7% m/m in July.

On the downside, the weakness in business surveys for the construction sector materialised in August. Here, output fell 0.3% due to a collapse in repair and maintenance work in the private housing sector.

Meanwhile, services output stagnated for a second consecutive month. Weakness in the wholesale and retail sector knocked 0.5ppts off growth, mainly due to shrinking wholesale output. Following on from August’s ONS retail sales data, consumer-facing services managed to grow 0.1%.

Business services also showed a return to growth in August – as we expected – with administrative and support services surging 1% in August and the IT sector also eking out some growth. Admittedly, the professional services sector failed to recover. Its output stagnated after a big drop in July. Yet, the sector is still growing at 0.6% 3m/3m and is likely to recover in September.

All told, the UK economy managed to deliver some growth in August. However, we doubt this will last because it looks like negative sentiment around the Autumn Budget may have started to drag on the economy from September.

Growth slowed in Q3 – our UK economic forecast is unchanged

Despite the gain in consumer-facing services, consumers remain reluctant to spend. This won’t be helped by endless speculation in the coming months about the next Autumn Budget, which is one reason why we expect growth to have slowed to 0.2% in Q3.

Our forecast might sound optimistic against the backdrop of wider theorising and conversations about the next Autumn Budget. However, even if output shrinks by 0.1% in September, then the economy will have grown 0.2% in Q3. We’re waiting for more data before we make a strong judgement on September’s growth, but weak business surveys and a drop in consumer confidence already for the month means we grow increasingly confident that growth is more likely to meet our call, rather than the Monetary Policy Committee’s punchy 0.4% forecast.

Looking backwards to the second half of last year, the latest revisions to the data lift growth to 0.2% per quarter. This will provide some reassurance to the Chancellor that negative sentiment around the last Autumn Budget didn’t cause the economy to stagnate. We expect a similar pace of growth over the rest of this year. The risk is that after promising not to come back for further tax rises, another round of tax hikes from the Chancellor knocks confidence even more and causes the economy to stagnate.

Ultimately, the economy continues to tick along just fine. Annual growth has averaged 1.5% so far this year as the economy grows at capacity, in part thanks to strong government spending providing a tailwind to growth despite the headwinds from tariffs and slower global growth. Indeed, with inflation set to hit 4% in September and the economy growing at potential, we continue to think the MPC will keep interest rates on hold until next year to avoid letting the lid off inflation, even as growth slows.

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