The Midday Market report is a new newsletter from City AM, giving you fresh analysis on the biggest stories in the City straight into your inbox every lunchtime. Today, Ali Lyon, assesses whether August’s positive GDP figures are a sign of a revival in the UK economy. Sign up to the City AM News Updates newsletter here.
For much of the past decade and a half, describing the UK economy has been a relatively easy task. ‘Languid’ has often worked. ‘Stuttering’ has been another favourite. And when things have looked especially sullen, ‘moribund’ or ‘anaemic’ have more than sufficient.
But if today’s GDP figures are anything to go by, then cliche-dependent hacks like this one might find themselves having to reach for their thesauruses in search a new vernacular.
Granted, a 0.1 per cent jump in economic activity in August is hardly cause to crack open the English sparkling wine. But it was, as almost every economist has been at pains to point out this morning, an expectation-defying 0.1 per cent nevertheless.
The headwinds facing the upward nudge were manifold. And the sources of that resilience – improved productivity, early signs of a tech boom, and an uptick in our, yes, ‘moribund’ manufacturing sector – inspire some confidence.
It is worth reflecting on why quite so many macro analysts are in such a celebratory mood. First, many had – quite understandably – expected the Middle East conflict, now stretching into its eighth month, to finally get its talons into business and consumer sentiment.
Despite what Berenberg’s Andrew Wishart catchily frames as a “quadruple whammy” of rising taxes, higher energy prices, higher mortgage rates and a weak labour market, confidence has, in fact, been improving this year (albeit from a strikingly low ebb). A look at consumer and services spending in today’s figures, and the trend has again defied expectations to the upside.
Then there is the fact that August’s figure was going up against a tricky month-on-month comparative period. Boosted by spendthrift World Cup watchers, the UK economy grew by 0.4 per cent in both June and July, leading most economists to pencil in a minor contraction over the sleepier month of August.
All of which means that over a three-month comparison period, Britain’s once-languid economy has now grown by 0.7 per cent, and 2.1 per cent over the past year. Stripping out the pandemic recovery, that is the economy’s best full year since around 2017.
“The UK’s resilience story continues,” Deutsche Bank’s Sanjay Raja said this morning. “It’s hard to overstate how strong the UK performance has been all year.”
The UK economy’s bleak midwinter
Because we can’t have nice things, there is, I’m afraid, a ‘but’. And that ‘but’ relates to what comes after what most think will be a solid end to the year.
Early forecasts suggest that the start to 2027 could look a lot different from much of 2026. The Bank of England looks increasingly likely to raise interest rates at its next meeting in November, with another 25 basis-point hike expected in early 2027. That alone will considerably shift households breathing space – and with no end of the inflationary Iran war in sight – price pressure remains uncomfortably hot; especially with the economy chugging long as healthily as it is.
Even more ominous is the direction of energy prices, which are due to build up a head of steam at the start of next year. By the Bank of England’s reckoning, households can expect their energy bills to jump by some 20 per cent in January. That, in turn, will help carry inflation to four per cent, double the monetary authority’s two per cent target. All the while, improvement in people’s pay is expected to slow.
“The combination of rising inflation and slowing wage growth is a toxic mix for households’ real income growth,” says RSM UK’s Thomas Pugh.
Then again, people much cleverer than me have been predicting a sharp economic downturn for much of this year – and it hasn’t materialised. But with so many competing headwinds, overwhelming consensus is we can only be so resilient. Journalists’ thesauruses appear safe, for now.