Britain's economy expanded unexpectedly in August, according to official data released on Thursday, offering a measure of relief to Finance Minister John Healey as he prepares the Labour government's first budget later this month. Gross domestic product rose 0.1% month-on-month, beating analysts' consensus forecast of a 0.1% contraction, though it marked a slowdown from July's 0.4% growth.
The figures, published by the Office for National Statistics (ONS), show that the economy continues to show resilience even as households tighten their belts. Prime Minister Andy Burnham, who has made easing the cost of living a central pledge of his government, has warned that difficult decisions lie ahead in the 28 October budget presentation.
Services sector leads, but consumers hold back
The ONS attributed the August uptick to strong performance in services, particularly computer programming, which was again the largest contributor to growth over the three months to August. The boom in artificial intelligence-related spending has been a notable driver, with businesses investing heavily in technology.
However, the data reveals a divergence within the economy. While businesses are performing well, partly thanks to AI-related investment, households are becoming more circumspect. Paul Dales, chief UK economist at Capital Economics, noted: "There is a bit of a divergence going on within the economy, with businesses performing well (partly due to AI-related spending) while households are becoming more circumspect."
Consumer spending fell in August, reflecting ongoing pressure from high interest rates and inflation. The Bank of England has held rates at elevated levels to combat price rises, and analysts expect inflation to climb again towards the end of the year as higher oil and gas prices feed through to household bills. The conflict in the Middle East shows no sign of abating, keeping energy markets on edge.
Fiscal discipline and budget uncertainty
Healey has pledged to maintain strict fiscal discipline, but has not confirmed whether the budget will include new tax rises to reduce Britain's debt pile. With government bond yields reaching multi-decade highs, the cost of servicing that debt is a growing concern. The International Monetary Fund's gloomy outlook for 2027 suggests the UK is far from out of the woods, according to Samuel Edwards, head of client portfolio management at financial solutions firm Ebury.
"Rising energy prices linked to the ongoing Iran conflict risk reigniting inflation, potentially forcing the Bank of England to raise interest rates further and piling more pressure on households and businesses," Edwards said in a client note. "With confidence already fragile, the prospect of further tax rises in the Autumn Budget could see consumers rein in spending and businesses put investment on ice."
Edwards advised businesses to strengthen their financial resilience, keeping operations lean, maintaining access to finance, and using effective FX hedging to limit exposure to volatility. His comments echo broader concerns across Europe, where energy prices and geopolitical tensions are weighing on economic sentiment.
The ONS also reported that GDP grew 0.7% in the three months to the end of August, a solid pace that suggests the economy is more robust than previously thought. Dales added: "We still expect the coming rise in inflation to dampen growth, but the economy is more robust than we thought."
As the budget approaches, all eyes will be on Healey's decisions. The government faces a delicate balancing act: stimulating growth while maintaining credibility with markets. The unexpected August growth provides some breathing room, but the underlying weaknesses—consumer caution, inflation risks, and high debt—remain.
For now, the UK's economic narrative is one of resilience amid uncertainty, with the services sector and AI investment providing a buffer against household strain. Whether that can be sustained will depend on the budget's measures and the trajectory of global energy prices.
