The U.K. economy expanded 0.1% in August, the Office for National Statistics reported Thursday, defying forecasts of a 0.1% contraction that economists polled by Reuters had widely expected. The surprise growth was powered entirely by production, which rose 0.8% on the month, while the services sector — roughly 80% of British output — posted no growth at all.
On an annual basis, GDP climbed 2.1% in August, well ahead of the 1.7% economists had projected. The ONS said that figure marked the highest year-on-year growth rate since 2022, a reading that gives the government of Prime Minister Keir Starmer a rare piece of encouraging economic news after months of sluggish data.
Financial markets reacted immediately. The pound jumped 0.4% against the U.S. dollar following the release, and yields on U.K. government bonds, known as gilts, fell across maturities as traders trimmed bets on near-term interest rate cuts from the Bank of England.
The headline beat, however, masks weakening momentum. Monthly growth has slowed from the faster pace recorded earlier in the year, and the flat services reading is a warning sign for a sector that drives most British employment and tax revenue. A 0.8% gain in industrial production — a category that includes manufacturing, mining and utilities — can swing the monthly GDP figure on its own because it represents a smaller slice of the economy.
Britain's economy has struggled to gain traction since the pandemic, growing more slowly than the United States and lagging the euro area in several recent quarters. Households remain squeezed by elevated borrowing costs, with the Bank of England holding its key interest rate at 4% after cutting it earlier in the year, and consumer-facing services such as hospitality and retail have reported soft demand.
The ONS release did not break out which industries drove the production gain, and the agency cautioned that monthly GDP figures are volatile and subject to revision. August's reading follows a period of uneven data in which the U.K. alternated between modest expansion and outright contraction, leaving the overall trend short of the sustained growth the government has promised.
Chancellor Rachel Reeves has staked her budget plans on faster growth to fund public spending without raising taxes further, making each monthly GDP release a political as well as an economic event. Thursday's numbers give her a data point to cite, but the flat services performance leaves the underlying picture far weaker than the headline suggests.
The Bank of England's next rate decision, due in November, will weigh this reading against inflation that has hovered near the central bank's 2% target. Traders pared back expectations for a December cut after Thursday's release, according to market pricing.
