Economy · · 2 min read
Editor: Bohdan S.
UK economy grows 0.1% in August, beating forecasts of a contraction
Factory output kept Britain growing in August while services stalled, giving the pound a lift and gilt yields a dip ahead of chancellor John Healey's first Budget on October 28.
The short answer
The UK economy grew 0.1% in August, the Office for National Statistics said, beating forecasts of a 0.1% fall. Production rose 0.8%, but services were flat and construction shrank. Growth has slowed from 0.4% in June and July, which narrows the room for chancellor John Healey ahead of his October 28 Budget.
What happened
UK gross domestic product rose 0.1% between July and August, according to the Office for National Statistics. Economists polled by Reuters had expected a 0.1% decline, CNBC reported. Production output climbed 0.8%, services output was unchanged and construction slipped 0.2%. Compared with August 2025, the economy was 2.1% bigger, the strongest annual rate since August 2022. Over the three months to August, GDP grew 0.7% on the previous three months. The pound rose about 0.4% against the dollar after the release, and the 10-year gilt yield fell around 9 basis points to roughly 5.34%.
What it means
The headline beat hides a slowdown. Monthly growth fell from 0.4% in both June and July, and services, which make up most of the UK economy, did not grow at all in August. Deutsche Bank's chief UK economist Sanjay Raja noted that consumer-facing services, construction and IT all weakened on the month, as energy costs and higher interest rates squeeze households and businesses.
The bigger picture is still firmer than many expected earlier in the year. The ONS said growth over three months has now been positive for eight periods in a row, led by professional services and information and communication. Computer programming and consultancy alone added about 0.32 percentage points to growth over the past year, and Raja described the UK as the fastest-growing G7 economy so far in 2026.
The figures arrive at an awkward moment for the Treasury. Healey must stick to fiscal rules designed to keep public debt in check while also easing the pain of high energy bills. Rising interest costs on government debt have eaten into his headroom, the gap between planned borrowing and the limits set by those rules. Joe Nellis of accountancy firm MHA warned that tax rises carry risks for spending and investment, while large unfunded promises could push borrowing costs higher.
For markets, the reaction suggests investors were relieved. Falling gilt yields lower the cost of government borrowing, at least for now, and a stronger pound slightly eases the cost of imported energy for a country that buys much of its fuel from abroad. Scott Gardner of J.P. Morgan Personal Investing said the outlook for the rest of the year remains uncertain with the Budget still to come.
The bull case
The economy avoided the expected contraction and is growing at its fastest annual pace in four years. Production bounced back, services have grown strongly over three months, and lower gilt yields after the release help both the Treasury and mortgage borrowers. Solid growth also supports tax revenues, which could give Healey a little more room in the Budget.
The bear case
Momentum is clearly fading: services were flat and construction fell. High energy prices and rising borrowing costs are biting, and a Budget that raises taxes could slow growth further. The 10-year gilt yield remains above 5%, so the government's interest bill stays heavy, limiting what it can do to support households.
Why it matters
For investors
Sterling and UK government bonds reacted most, with the pound up and gilt yields down after the data. UK-focused stocks such as housebuilders and domestic banks are sensitive to both growth and the Budget.
The wider context
Steady growth supports jobs and wages, but households still face high energy and borrowing costs. What Healey announces on October 28 on taxes and support with bills could matter more for budgets than this month's figure.
Market impact
| Asset (ticker) | Possible move | Timeframe | Why |
|---|---|---|---|
| British pound (GBP/USD) | ↑ Up | Short term | Sterling rose about 0.4% against the dollar after the better-than-expected data. |
| UK 10-year gilt yield | ↓ Down | Short term | Gilt yields fell around 9 basis points across the curve after the release. |
| iShares MSCI United Kingdom ETF (EWU) | ↔ Unclear | Short term | Growth beat forecasts, but slowing services and Budget uncertainty offset it. |
The FinPrism newsroom's view of how these figures could move, as of . It is general news commentary, not a recommendation to buy, sell or hold anything.
Frequently asked questions
How much did the UK economy grow in August 2026?
UK GDP grew 0.1% in August 2026 compared with July, according to the Office for National Statistics. Economists had expected a 0.1% fall. Compared with August 2025, the economy was 2.1% larger, the strongest annual growth rate since August 2022.
Is the UK economy slowing down?
Monthly growth slowed from 0.4% in June and July to 0.1% in August, and services showed no growth. But GDP rose 0.7% over the three months to August, the eighth straight three-month rise, so the economy is still expanding, just more slowly.
When is the UK Autumn Budget 2026?
Chancellor John Healey will deliver his first Budget on October 28, 2026. Analysts say slowing growth and higher debt interest costs leave him limited room to raise spending or cut taxes while sticking to the government's fiscal rules.
Sources: Office for National Statistics, CNBC
How this was made: written with AI assistance from the sources listed above, following our editorial standards.
