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(Bloomberg) — The UK economy returned to growth in August, putting Prime Minister Keir Starmer on track for a modest recovery before worries about his first budget began to weigh on sentiment.
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Gross domestic product rose 0.2% from July, in line with economists’ expectations, according to data from the Office for National Statistics. Services, production and construction all expanded on the month.
The figures leave the economy on course for growth in the third quarter, albeit at a more modest pace than in the first half of the year when Britain outpaced all of its Group of Seven peers. All else equal, the economy will expand barring GDP falling in September by 0.3% or more.
How well the economy held up in September is in doubt, however, after a series of bleak warnings by the government about the state of the public finances hit sentiment. Consumer confidence fell at the fastest rate since Russia’s invasion of Ukraine last month and business chiefs are the most concerned they have been in two years, according to a survey by the Institute of Directors.
“The latest GDP report shows that the UK economy was still growing solidly, at least in August,” said Luke Bartholomew, deputy chief economist at Abrdn. “But given the deterioration in business and consumer confidence since then, this feels like somewhat stale data.”
The pound was little changed following the release, down less than 0.1% to $1.3051. The currency has fallen almost 3% since reaching the highest level in more than two years at the end of September, with traders adjusting for a potentially faster pace of cuts from the Bank of England.
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“The mild gain in August’s GDP is further evidence growth momentum is likely to cool in Britain in the second half of the year. That will be reassuring for the Bank of England, which has expressed concerns about the prospect of overcapacity emerging in the economy further ahead and derailing progress on inflation. We see another rate cut at the November meeting.”
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The Labour government is counting on growth being sustained to generate the money needed to deliver on its pledge to fix deteriorating public services. Starmer has pledged to boost GDP growth to 2.5% a year, a tall order for an economy that averaged just 2% in the decade following the 2008-09 financial crisis and barely grew last year. However, falling interest rates, rising real incomes and the prospect of increased government spending on investment are expected to support the economy heading into next year.
Chancellor Rachel Reeves said it was “welcome news that growth has returned to the economy.”
The three main sectors of the economy rose over the month, with 0.1% growth in services, 0.4% in construction and 0.5% in the production industries. Manufacturing rebounded from a steep fall in July to expand 1.1% in August.
“In August accountancy, retail and many manufacturers had strong months, while construction also recovered from July’s contraction,” said Liz McKeown, ONS director of economic statistics. “These were partially offset by falls in wholesaling and oil extraction.”
–With assistance from Mark Evans, Joel Rinneby and Aline Oyamada.
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