91探花

The UK economy grew by 0.2% month-on-month (m/m) in August after two months of flat growth, reducing concerns that the UK was falling back into stagnation. Growth is likely to slow in the second half of the year now that all of the catch up from the recession has occurred. But this will be reassuring for the Bank of England (BoE), which has expressed concerns about the prospect of fast growth keeping inflation strong. We expect the next interest rate cut to come in November.

Growth rate across sectors

Growth was broad based across sectors. Services output rose by a marginal 0.1% on the month, production rebounded by 0.5% and construction increased by 0.4%.

Wholesale and retail surprised on the downside, as a 1.2% month-to-month fall in car sales and a 1.6% month-to-month drop in extremely volatile wholesale output overwhelmed a jump in retail sales. Both sectors should rebound in September, setting up GDP to grow strongly in Q4. Healthcare output also dropped 0.1% despite strikes that depressed output in July ending. That should also unwind next month. Professional services, the powerhouse of the H1 GDP rebound, returned to strong growth, rising 1.6% month-to-month.

Manufacturing output gained 1.1% month-to-month, helped by a jump in car production. Manufacturing growth will slow in September, but we expect the sector to continue trending up. For instance, the manufacturing PMI output balance averaged 53.1 in Q3, consistent with around 1% three-month-on-three-month manufacturing output growth. Construction output also rose, by 0.4% month-to-month, aided by better weather and correcting for an erratic fall in July. Construction should also keep contributing to GDP growth, supported by lower interest rates. 

Outlook for UK economy - spending and investment prospects

We expect consumer spending to pick up over the rest of the year, though, as rising real incomes, improving confidence and lower tax and interest rates feed through into final spending. Similarly, the sharp rise in business confidence over the last few months, combined with lower interest rates should spur a revival in business investment and the Autumn Budget is likely to reveal a surge in government investment. 

In its August forecast, the BoE suggested that one of the key risks to the outlook was that growth could be faster than it expected, meaning domestically generated inflation is stickier in the medium term.

That’s a big reason why we expect it to be cautious about how quickly it eases policy over the remainder of this year and into 2025. We see one more cut in 2024 - in November - and four in 2025.

Overall, the UK economy has shown a solid performance in the first half of the year, but we need to see signs of rising incomes and confidence feeding though into actual spending and investment to drive growth over the next year. 

Sign up to our for regular commentary and analysis from Tom on the changing economic landscape.