Key facts
- The UK economy grew 0.3% in June and 0.4% in the second quarter, driven by the services sector.
- The services sector PMI reached a six-month high of 52.8 in August.
- Consumer confidence rose to its highest level in two years in August.
- Despite a drop in July retail sales, sales volumes were up 4% year-on-year over the three months to July.
- The government recorded an unexpected budget deficit last month.
- Inflation and public finances remain key risks for the upcoming budget.
Britain's economy is showing unexpected signs of strength, with the services sector experiencing its best growth in six months and consumer confidence reaching a two-year high. This positive data provides an early boost for Prime Minister Andy Burnham and Finance Minister John Healey as they prepare for Healey's first budget in October.
The economy expanded by 0.3% in June and 0.4% in the second quarter, with the services sector leading the growth. This performance puts Britain on track for the fastest growth among G7 economies in the first half of the year, though some economists suggest seasonal adjustments might be influencing the figures. Investment in tech equipment and AI-related industries is also becoming visible in economic data.
The S&P Global Purchasing Managers' Index for services rose to 52.8 in August, exceeding expectations. Additionally, the Confederation of British Industry reported its highest manufacturing order books since November 2024, driven by strong export orders. Consumer sentiment surveys, including GfK's index, also indicate an improving mood among households.
Despite these positive trends, significant challenges remain. Inflation, exacerbated by global energy price volatility linked to the U.S.-Iran war, continues to be a major concern. Consumer price growth is expected to exceed 3% in the coming months. Furthermore, the government recorded an unexpected budget deficit last month, with inflation-linked spending counteracting strong income tax receipts. While borrowing figures have been revised down in recent months, the overall state of public finances remains strained.