UK Economy Edges Up 0.1% in August Following July Contraction, Signalling Slow Growth

UK Economy Shows Marginal August Expansion

The United Kingdom's economy registered a slight expansion of 0.1% in August, according to the latest data released by the Office for National Statistics (ONS). This modest growth follows a revised 0.1% contraction in July, painting a picture of persistent slow growth and economic fragility. The August rebound offers a glimmer of positive news for policymakers, including Chancellor Rachel Reeves, ahead of the upcoming Autumn Budget.

Mixed Performance Across Key Sectors

The August growth was primarily driven by a 0.7% expansion in the manufacturing industry, which reversed a significant fall in July, alongside a strong performance by the health sector. However, the dominant services sector, which accounts for approximately 80% of the UK economy, showed no growth for a second consecutive month. This stagnation in services, particularly in consumer-facing businesses like retail and entertainment, highlights a cautious approach from consumers. Conversely, business demand, such as rental and leasing activities, provided some support. The construction sector also faced headwinds, contracting by 0.3%, as a decline in repair and maintenance work offset growth in new building projects.

Underlying Economic Headwinds Persist

Economists have described the recovery as 'sluggish' and 'fragile', with the economy appearing to have 'come to a standstill' over the three months to August, growing by just 0.3%. Several factors continue to weigh on the UK's economic performance. Inflation, which stood at 3.8% in August 2025, remains above the Bank of England's 2% target, with expectations for it to rise to 4% in September before gradually falling. The Bank of England has been gradually reducing interest rates since August 2024, with the rate lowered to 4% in August 2025, to curb inflation. However, high borrowing costs and the ongoing cost of living crisis continue to impact consumer spending and business investment.

Outlook and Official Commentary

The current economic climate presents a delicate balancing act for policymakers. The Chancellor is reportedly facing a significant spending gap and is considering tax rises to address it, with the Autumn Budget scheduled for November 26. The International Monetary Fund (IMF) projects the UK economy to grow by 1.3% in 2025, placing it as one of the fastest-growing G7 economies, yet it also forecasts the UK to have the highest inflation in the group into 2026. This combination of weak growth and persistent inflation creates a dilemma for the Bank of England regarding future interest rate decisions. Experts note that for many households, the recovery remains distant, as rising living costs and higher borrowing rates continue to squeeze disposable incomes.