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LONDON – Britain's economy returned to growth in August after two consecutive months of stagnation, providing a slight rebound as the Labor government prepares to present its first budget later this month.
Flash figures released by the Office for National Statistics on Friday showed the economy grew 0.2% month-on-month, meeting expectations of economists polled by Reuters.
This follows an economic slowdown in June and July after the UK recorded modest but steady growth in almost every month this year. Great Britain emerged from a shallow recession at the start of the year.
In the three months to August, UK economic growth also grew by 0.2%, compared with 0.5% in the three months to July.
“The UK economy has had a remarkable run in the first few months of 2024, at least if the monthly GDP figures are to be believed. But the same numbers now show that this strength was short-lived,” ING developed markets economist James Smith said in a note shortly after the release.
“The bottom line is that the economy still appears to be growing at a reasonable pace, but the quarterly GDP figures of 0.6/0.7% that we have become accustomed to in the first two quarters of the year will be moderated in the “We will not repeat this in the second half of the year.” Overall, we expect growth of 0.2% for the third quarter.
sterling It rose slightly against the U.S. dollar following the release, trading 0.05% higher at $1.3067 at 8:56 a.m. London time. British government bond yields, meanwhile, fell, trading at around 4.211% on the 10-year note, after rising sharply in recent days.
Britain's dominant services sector posted modest growth of 0.1% in the month to August, while manufacturing and construction output rose 0.5% and 0.4% respectively.
Finance Minister Rachel Reeves welcomed the data and said returning the economy to growth was the government's “top priority”.
“While change will not happen overnight, we are wasting no time in delivering on the promise of change,” she said in a statement. The new Labor government was voted to power in a snap election in July.
All eyes on the budget
The reading comes as Reeves is set to present her fall budget later this month. Tax hikes and spending cuts are expected as she tries to close an estimated 22 billion pound ($29 billion) black hole in public finances. The conservative opposition party, which led the country until early elections earlier this year, denies this gap.
ING's Smith said if the UK Treasury had hoped that strong growth in the first half of the year would create some “additional fiscal space” in the budget, “it is likely to be disappointed.”
“Remember that what matters here is what the Office for Budget Responsibility forecasts for the UK economy. And like the BoE, they are unlikely to draw much conclusions from GDP numbers so far this year, at the more optimistic end of the spectrum,” he added.
The government is presenting its vision of an era of “national renewal” and trying to inject some optimism into the public psyche after painting a bleak picture of the economic situation.
Lindsay James, investment strategist at Quilter Investors, said Reeves faces a “difficult trade-off” to ensure her decisions do not hinder further economic growth.
“As interest rates begin to fall, responsibility has shifted from the Bank of England to Rachel Reeves, who now has to make key budget decisions. She and the prime minister have suggested that “pain” is necessary for future prosperity, but there is a real danger of over-correction at the expense of economic growth, she said.
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