UK economy returned to growth in August

Official figures revealed that the UK economy grew by 0.2% in August after flatlining in June and July. Output from all main sectors of the economy – services, industrial production and construction – grew in August, with accountants, retailers and manufacturers having a particularly strong month. 

In the three months to August 2024, a better measure of the underlying trend, UK GDP grew by 0.2%, down from 0.3% in the previous three-month period. August’s uptick is unlikely to have prevented a slowdown in GDP growth across the third quarter, as lower business and consumer confidence may well have squeezed activity in September.

Business confidence drops back

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) – one of the largest and most comprehensive quarterly surveys of UK business activity – dropped to 14.4 on the index in Q3 (see Chart 1), the first decline in 12 months and down on last quarter’s reading of 16.7. However, business confidence remains strong and is still double the pre-pandemic average. 

The fall in confidence was likely to have been driven by mounting concerns over the tax burden and weaker exports growth, while investment remained low. The tax burden was cited as a growing challenge by 29% of businesses, a joint record high for the survey and significantly higher than the historic average. Exports growth slowed to 2.7% in Q3, down from 3% in the previous quarter and the lowest rate since Q4 2023, likely due to concerns over demand in key overseas markets.

UK inflation falls below target for now

UK CPI inflation dropped from 2.2% to 1.7% in September 2024, the first time since April 2021 that the headline rate has dropped below the Bank of England’s 2% target. The biggest downward pressure on prices came from lower airfares and petrol prices, which were partially offset by the first increase in food price inflation since April 2023. September’s decline may have been reversed in October, given the rise in energy bills, following the 10% increase in the Energy Price Cap, which is likely to have pulled the headline rate back above the Bank of England’s 2% target.

Wage growth continues to slow

UK regular pay growth (excluding bonuses) was 4.9% in the three months to August 2024, the lowest rate since the three months to June 2022 and down from 5.1% in the previous three-month period. However, with UK inflation cooling at a much faster rate, pay growth remains positive in real terms and therefore people’s spending power remains strong (see Chart 2). The manufacturing sector saw the largest annual regular growth rate at 6.0% and construction (4.2%) recorded the weakest growth. Public sector pay growth (5.2%) exceeded private sector wage growth for the seventh successive three-month period. 

OBR’s underwhelming view of UK’s economic outlook

While the OBR (Office for Budget Responsibility) has upgraded its growth forecast in this year and 2025, this is then offset by weaker expected growth from 2026. Its growth forecasts suggest that the government will probably miss its target of making the UK the fastest-growing economy in the G7 in the current parliament.

The OBR expects the policies announced in this Budget to lead to a sustained increase in real government spending as a share of GDP, rising by around 0.8 percentage points of GDP between 2023 and 2029 (See chart 3). This increase in government activity is projected to crowd out some private consumption, business investment and net trade. Corporate profits are expected to continue falling as a share of GDP in the near term, before rising gradually from 2026 as firms rebuild margins and pass on more of the cost of the employer NICs rise.

Will interest rates fall this month?

The slowdown in inflation and wage growth together with some signs that the labour market continued to loosen gradually, supports the growing expectation that the Bank of England will cut interest rates from 5.00% to 4.75% at their next policy meeting on 7 November. Although a November interest rate cut looks nailed on, the upward pressure on inflation from the notably higher business costs resulting from some of the measures announced in the Autumn Budget may mean that over the next year policy is loosened more slowly than many had expected.

UK economy – what to watch for this month:

• Alongside its next interest rate decision on 7 November, the Bank of England will present its updated economic forecasts.
• The quarterly GDP data, to be released on 15 November, is likely to confirm that UK GDP growth slowed in the third quarter, from 0.5% in Q2.
• The inflation figures for October, out on 20 November, should show an increase in the headline rate, from 1.7% in September.