UK economy grows unexpectedly in August, defying forecasts of contraction

GDP rises 0.1% despite falling consumer spending ahead of chancellor's first budget

By LineZotpaper

Published15 October 2026

Updated15 October 2026

Read Time3 min

Sources3 outlets

The UK economy grew by 0.1% in August, official figures show, defying City forecasts of a contraction and giving the chancellor a surprise boost less than a fortnight before his first budget.

The Office for National Statistics said gross domestic product rose 0.1% in August, following 0.4% growth in July and confounding a forecast by City economists of a 0.1% contraction.

The reading arrives with the Middle East conflict rattling the global economy and hitting British households and businesses with a surge in energy costs. The consumer-facing services sector fell 0.3% on the month, after a 0.1% decline in July, with the largest negative contribution coming from sports, amusement and recreation activities and a slump in food and drink services. Analysts said the fall could signal a reversal of an earlier boost from the World Cup and unusually hot weather, or reflect households trimming their spending.

Despite no growth in the overall services sector, the surprise improvement was driven by strength in manufacturing, with 0.8% growth in the wider production sector, which includes manufacturing, mining and energy generation. Construction output fell 0.2%.

Sanjay Raja, chief UK economist at Deutsche Bank, said: "Undoubtedly, there may be some hiccups to come in the run up to year end, especially as energy prices continue to bite household incomes, and higher rates continue to drag on spending and investment. The good news? The UK's resilience story continues. It's hard to overstate how strong the UK performance has been all year."

Britain's economy has shown more resilience than expected since the start of the Iran war, recording the strongest rate of growth in the G7 in the first half of 2026. Official figures suggested a strong expansion in AI-related business activity was one factor behind the surprise rise. Jake Finney, senior economist at PwC, said: "The UK's growth performance has been a bright spot amid a less impressive run of economic news following events in the Middle East. Business investment has been an important driver, particularly spending on ICT hardware, likely linked to the build-out of AI infrastructure."

The International Monetary Fund this week upgraded its UK growth forecasts for this year, but warned it expected a modest slowdown in 2027 as higher energy prices take their toll.

Healey is under pressure to use his tax and spending address to the Commons on 28 October to announce a package of support to soften the blow, including energy help for poorer households, while facing a delicate balancing act amid a sharp increase in government borrowing costs.

Analysis

Why This Matters

The data lands less than a fortnight before John Healey's first budget on 28 October, when he must balance a support package for households facing higher energy bills against sharply rising government borrowing costs.
Consumer-facing services have now fallen for two consecutive months, a sign that higher energy prices and petrol and diesel costs are starting to bite household spending.
The IMF upgraded its UK growth forecast for this year but expects a modest slowdown in 2027, meaning the current resilience may not last.

Background

Britain has recorded the strongest rate of growth in the G7 in the first half of 2026, showing more resilience than expected at the start of the Iran war. The latest surprise improvement was driven by manufacturing and business investment in ICT hardware linked to AI infrastructure, rather than consumer demand. Monthly GDP figures are volatile and subject to revision. The 28 October budget is the new chancellor's first major fiscal statement.

Key Perspectives

John Healey, the chancellor: Under pressure to use his budget address to announce support including energy help for poorer households, but faces a delicate balancing act as government borrowing costs have risen sharply. Economists: Sanjay Raja of Deutsche Bank says the UK's resilience story continues, though there may be hiccups before year end as energy prices bite and higher rates drag on spending and investment. Jake Finney of PwC points to business investment in ICT hardware, likely linked to AI infrastructure, as an important driver. Skeptics: The fall in consumer-facing services suggests households may be trimming spending. Analysts have also noted the decline could represent a reversal of the earlier boost from the World Cup and hot weather.

What to Watch

John Healey's tax and spending address to the Commons on 28 October, and whether it includes a support package for poorer households facing rising energy bills.
The direction of energy prices and their effect on household spending in the coming months.
Government borrowing costs, which have risen sharply and will constrain the chancellor's fiscal room to manoeuvre.

Sources

UK economy unexpectedly grows in August despite fall in consumer spending — Business | The Guardian
UK economy unexpectedly grows in August despite fall in consumer spending — UK news | The Guardian
UK economy unexpectedly grows in August despite fall in consumer spending — World news | The Guardian