The UK economy returned to growth in August, as activity picked up after a worse-than-expected slump in July.
A modest 0.2% rise in gross domestic product in August was driven by a jump in business services output that offset a downturn in manufacturing and the negative impact of the US film and TV writers’ strike, which has closed down large parts of the British film industry.
A previous estimate of GDP in July of 0.5% was revised down to 0.6% to leave growth over the the three months to August – a closely watched figure in the City – up by 0.3%.
Despite the modest growth in August, concerns are rising that the UK economy is heading into recession as higher interest rates weigh on demand.
Bank of England policymakers last month left interest rates on hold for the first time in nearly two years, keeping them at 5.25% in response to a weak outlook for the economy and despite high inflation.
Swati Dhingra, one of the Bank’s nine rate-setters, said on Thursday that most of the impact of 14 rate rises was yet to be felt.
“The economy’s already flatlined, and we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy,” she told the BBC. “So I think there’s also this worry that that might mean we’re going to have to pay a higher cost than we should be paying.”
The main driver of growth in August was the services sector, which grew by 0.4%, the Office for National Statistics said.
A return to more normal levels of school attendance across the eduction sector was another boost for GDP, the ONS said, while both computer programmers and engineers both had strong months.
Growth was restricted by the manufacturing sector, which had a setback in August after a strong June and July spurred by a rise in car factory output. The construction sector slipped by 0.4% in August after a 0.5% fall in July.
The arts, entertainment and recreation sector fell by 7.4% in August. after a 6.8% expansion in July.
Ruth Gregory, the deputy chief UK economist at the consultancy Capital Economics, predicted the UK economy would shrink in the July-September quarter, and again in October-December. That would mean two consecutive quarters of contraction – the technical definition of a recession.
Gregory said: “The 0.2% month-on-month rise in GDP in August will raise hopes that the economy has escaped a recession. But some of the strength of GDP in August was due to temporary factors and the timelier survey measures of activity point to a drop in real GDP in September.
“So we are sticking to our below-consensus forecast that the economy will shrink by 0.2% quarter on quarter in both the third quarter and the fourth quarter.”
Labour said the figures showed the economy remained trapped in a “low growth, high-tax cycle” that was “leaving working people worse off”. However, the chancellor, Jeremy Hunt, said the rise in GDP showed the economy was resilient.
Hunt said: “The UK has grown faster than France and Germany since the pandemic and today’s data shows the economy is more resilient than expected. While this is a good sign, we still need to tackle inflation so we can unlock sustainable growth.”
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said high interest rates were hurting growth, pushing the economy “uncomfortably close to recession” into 2024.
“This disappointingly weak return to growth points to an economy fraying at the edges as inflation and higher interest rates hinder businesses and consumers,” Thiru said.
“With inflation, higher taxes and the lagged impact of previous interest rate rises weighing heavily on consumer demand and business activity, the UK is likely to remain uncomfortably close to recession well into next year.
At the International Monetary Fund conference in Marrakech this week, the Washington-based body said its latest forecasts showed the UK economy would grow by 0.5% this year, overturning an earlier estimate that it would shrink by 0.3%.
However, the IMF said the UK would be the slowest growing economy in the G7 club of advanced countries next year, with a growth rate of just 0.6%, weaker than growth of 0.9% and 1.3% expected for Germany and France respectively.
