The UK economy has shown more resilience than first feared at the start of the Iran war. Photograph: Andy Rain/EPAThe UK economy has shown more resilience than first feared at the start of the Iran war. Photograph: Andy Rain/EPAUK economy unexpectedly grows in August despite fall in consumer spendingLatest data showing surprise 0.1% growth is boost to John Healey a fortnight before his first budget
The UK economy unexpectedly continued to grow in August despite a fall in consumer spending before John Healey’s first budget as chancellor.
Figures from the Office for National Statistics showed gross domestic product (GDP) rose by 0.1% last month, compared with 0.4% growth in July. That confounded a forecast by City economists of a 0.1% contraction.
With less than a fortnight before Healey’s tax and spending announcement, the reading is a surprise boost amid the Middle East rattling the global economy and hitting British households and businesses with a surge in energy costs.
After petrol and diesel prices rose last month and as higher energy bills hit household spending, the ONS said the consumer-facing services sector fell by 0.3% on the month, following a decline of 0.1% in July.
The largest negative contribution came from sports, amusement and recreation activities, alongside a slump in food and drink services. Analysts said the fall could be a sign of a reversal from an earlier boost from the World Cup and unusually hot weather, or reflect households trimming their spending.
Despite the overall services sector showing no growth in August, the surprise headline improvement was driven by strength in manufacturing with 0.8% growth in the wider production sector, which includes manufacturing, mining and energy generation. Construction output fell by 0.2%.
Sanjay Raja, chief UK economist at Deutsche Bank, said: “Undoubtedly, there may be some hiccups to come in the run up to year end, especially as energy prices continue to bite household incomes, and higher rates continue to drag on spending and investment.
“The good news? The UK’s resilience story continues. It’s hard to overstate how strong the UK performance has been all year.”
Against a volatile backdrop, the chancellor is under pressure to use his tax and spending address to the Commons on 28 October to announce a package of support to soften the blow including energy help for poorer households. However, he will face a delicate balancing act amid a sharp increase in government borrowing costs.
In recent months, Britain’s economy had shown more resilience than had been expected at the start of the Iran war after recording the strongest rate of growth in the G7 in the first half of 2026. Official figures suggested a strong expansion in AI-related business activity as one factor behind the surprise rise.
Jake Finney, senior economist at PwC, said: “The UK’s growth performance has been a bright spot amid a less impressive run of economic news following events in the Middle East. Business investment has been an important driver, particularly spending on ICT hardware, likely linked to the build-out of AI infrastructure.”
In a fillip for the chancellor, the International Monetary Fund this week upgraded its UK growth forecastsfor this year, but warned that it expected a modest slowdown in 2027 as higher energy prices take their toll.
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The latest figures from the ONS showed GDP over the wider three months to the end of August rose by 0.7%. On an annual basis it said the economy had grown by 2.1%, the strongest growth rate since August 2022.
However, economists said momentum was likely to falter at the end of the year as households come under pressure from rising inflation. Healey would also face a challenging balancing act to support households with the cost of living within tight constraints on the public finances.
Financial markets currently anticipate the Bank of England to raise interest rates next month from the current level of 3.75% to 4%, before four more quarter-point rate increases in 2027.
Matt Swannell, the chief economic adviser to the Item Club, said: “We’re sceptical this strength can last … Some pullback looks inevitable. The impact of the conflict in the Middle East is also starting to be felt. Higher energy bills and petrol prices are pushing up inflation and hitting consumers’ spending power.”
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