UK economy grew 0.1% in August, beating expectations

The U.K. economy grew by a better-than-expected 0.1% in the month to August, with production growth offsetting weak output in services and construction.

Economists polled by Reuters had been expecting GDP to shrink by 0.1% between July and August. But the reading still marked a slowdown in momentum for British gross domestic product, which grew by 0.4% month-on-month in June and July.

Production grew by 0.8%, the U.K.'s Office for National Statistics said in a release on Thursday, while services showed no growth and construction fell by 0.2% in August.

On an annual basis, GDP grew by 2.1% in August, beating economists' expectations of 1.7%. The ONS said it marked the highest year-on-year GDP reading since August 2022.

The British pound jumped 0.4% against the U.S. dollar following the release, while yields on U.K. government bonds — known as gilts — fell across the curve. The yield on the benchmark 10-year gilt was last seen trading 9 basis points lower at 5.3364%.

The U.K., a net energy importer, is currently grappling with a cost-of-living crisis sparked by sticky inflation and surging energy costs in the wake of the Russia-Ukraine war and the Iran war.

The government will unveil its closely watched Autumn Budget later this month. It's tasked with sticking to the previous government's so-called fiscal rules aimed at reigning in public debt while delivering on promises to soften the blow of surging consumer costs.

Analysts said the slowdown in growth added to pressure facing U.K. finance minister John Healey as he prepares to deliver his first budget on Oct. 28.

Joe Nellis, head of economic research at accountancy firm MHA, said in a note that the slowing economy will weigh on Healey's "fiscal headroom" – the amount of leeway the government has to either increase spending or cut taxes.

"While continued economic growth should provide some support for tax revenues, the economy remains fragile. Rising debt interest costs have severely constrained fiscal headroom, with long-term government borrowing costs remaining exceptionally high," he said.

He added that any decision to raise taxes to balance the books "carries considerable risks," threatening to weaken consumer spending, undermine confidence and discourage corporate investment. But at the same time, Nellis said, significant unfunded spending commitments could unsettle financial markets and push government borrowing costs higher.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note following the ONS release that while it was positive to see the economy continuing to grow despite global challenges, the outlook for the rest of the year "remains uncertain with a tricky Autumn Budget ahead."