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Official data showed that the British economy partially rebounded in August, driven by a recovery in the services sector, in line with economists’ expectations.
According to data released by the National Bureau of Statistics on Thursday, gross domestic product increased by 0.2% in August from the previous quarter.
The increase follows a sharp 0.6% contraction in economic activity in July, when activity was largely disrupted by strike action and wet weather.
The data suggest the economy has expanded over the past three quarters but remains pressured by high inflation and borrowing costs and could struggle in the coming months.
“The economy entered a general slowdown in late summer and has worsened in recent months,” said Jair Selfen, chief economist at KPMG UK.
“The UK economy continues to feel the pressure of rising prices and high interest rates, with the full impact of past austerity policies still to be felt,” she added.
The size of the economy in August was below last May’s 2022 peak, showing the continued impact of high inflation and borrowing costs on UK output.
Bank of England rate setter Swati Dhingra told the BBC on Thursday that high interest rates were suppressing economic growth, particularly affecting the lives of young and more vulnerable people.
“The economy has stalled. We think only about 20% or 25% of the impact of raising rates has been translated into the economy,” she said.
Dhingra, who has voted against further interest rate hikes since joining the Monetary Policy Committee in August 2022, also noted that as with high inflation, “interest rates also tend to have a greater impact on younger, less educated people.” .
The Bank of England kept interest rates at 5.25%, marking the peak in borrowing costs after nearly two years of rate hikes.
On Thursday, the Bank of England released further signs of the impact of high borrowing costs on the economy. credit checka quarterly survey of banks and building societies.
The share of lenders reporting an increase in home mortgage delinquencies minus those reporting a decrease rose to 43% over the past three months, the report showed, the highest level since the second quarter of 2009.
Default expectations over the next three months are even higher.
Sanjay Raja, an economist at Deutsche Bank, said he expected “growth to become softer in the coming quarters, with the UK economy teetering between recession and stagnation”.
In August 2023, service industry output grew by 0.4%, driven by the professional services and education sectors, and was a major contributor to GDP growth.
Education activities were disrupted in July as teachers’ strikes across the country led to school closures.
Pantheon Macroeconomics economist Samuel Tombs said August’s modest rebound reflected higher output in the education and health sectors as strike disruptions subsided, rather than the “underlying dynamics” of the broader economy.
Output in consumer-facing services such as entertainment, bars and restaurants fell 0.6% in August and remains 4.3% below February 2020 levels before the Covid-19 pandemic.
Kitty Usher, chief economist at the Institute of Directors, said the pullback showed “recent rises in interest rates have led to households budgeting cautiously amid rising mortgage costs”.
Manufacturing output fell by 0.8% in August, and construction output fell by 0.5%. This marks a continuation of last month’s contraction.
More timely business surveys, such as the Purchasing Managers Index, forecast further declines in manufacturing and construction output in September.
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