The UK economy expanded by 0.1% in August, defying expectations of a contraction, as a robust performance in production offset flat services output and a further decline in construction. The data, released by the Office for National Statistics on Thursday, underscores the resilience of the British economy amid persistent inflation and elevated energy costs.
Economists polled by Reuters had anticipated a 0.1% month-on-month decline, making the positive reading a notable surprise. On an annual basis, GDP grew by 2.1% in August, surpassing forecasts of 1.7% and marking the strongest year-on-year growth since August 2022.
The production sector led the way, with output rising 0.8% during the month, while services recorded no growth. Construction output fell 0.2%, extending its recent weakness as high mortgage rates continue to weigh on the sector. Activity related to motor vehicle sales provided some support, but bars and restaurants saw a 2.7% monthly decline, highlighting the uneven performance across consumer-facing businesses.
The latest figures follow the International Monetary Fund's upward revision of UK GDP growth to 1.3% for this year, up 0.3 percentage points from its July forecast. However, the August reading marks a slowdown from the 0.4% monthly growth seen in both June and July, suggesting that momentum remains uneven.
UK resilience faces pressure from energy costs
The data adds to evidence that the British economy has outperformed initial expectations following the outbreak of the Iran war. The UK recorded the strongest growth among G7 economies in the first half of 2026, supported by business investment and activity associated with artificial intelligence infrastructure.
Sanjay Raja, chief UK economist at Deutsche Bank, said the economy had “surprised yet again” by expanding in August. He cautioned, however, that households and businesses could face further challenges as higher energy prices erode disposable incomes and elevated interest rates weigh 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. The UK economy remains the fastest-growing G7 economy,” Raja said. He also pointed to figures suggesting that GDP growth had reached 1.8% during the first eight months of the year, despite a decline of 95,000 jobs, if HMRC employment data are used.
Jake Finney, senior economist at PwC, said business investment had helped support economic activity, particularly spending on information and communications technology hardware. “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,” he said.
Pound rises as markets assess interest rate outlook
The pound rose 0.4% against the US dollar following the GDP release, while yields on UK government bonds, known as gilts, declined across the curve. The benchmark 10-year gilt yield was last down nine basis points at 5.3364%.
The economic outlook remains complicated by sticky inflation, elevated energy costs and the effects of the Russia-Ukraine war and Iran war on household finances. As a net energy importer, Britain remains vulnerable to further increases in energy prices.
Financial markets anticipate that the Bank of England will raise interest rates from 3.75% to 4% next month, followed by three additional quarter-point increases in 2027. The government is also preparing to unveil its closely watched Autumn Budget later this month, facing the challenge of adhering to fiscal rules designed to rein in public debt while addressing the pressure of rising living costs.
This article is for informational purposes only and does not constitute financial advice.
