By Kathleen Brooks, research director at XTB

The UK economy returned to growth in August, it expanded 0.2% on a monthly and 3-month-on-month basis. This means that unless the growth bounced back sharply last month, the UK economy most likely moderated in Q3 compared to the 0.5% growth rate in Q2. Delving into the details of the report reveals that all main sectors of the economy expanded last month, however, service growth was meagre at just 0.1%, while production and construction were robust, expanding by 0.5% and 0.4% respectively.

Service sector malaise

The picture is one of slowing growth in the UK, compared to the first half of this year. Some sectors that had an especially strong month included accountancy, retail and manufacturing. Although oil production was weaker. Service growth, which is usually been the mainstay of British growth, barely budged in August. This was weighed down by weakness in wholesale retail and there was a slight decline in the arts, entertainment and recreation sector. There was also a decline in real estate activity. The service sector has been on pause in recent months; however, wage data remains fairly strong. Could this lead to pent up consumption demand in Q4? We think so, and we also expect UK growth to ‘bounce’ back, after a small blip in Q3.

The ‘August effect’

It is worth noting that August can be a strange month for the UK economy. Typically, people are away, holidays are scheduled, and outside of main city centres that attract tourists, activity remains subdued before bouncing back in September. Thus, there is a chance that UK growth can beat expectations for September, and all is not lost for Q3 yet. Also, for the optimists out there, monthly growth in August in 2022 and 2023 was flat, so today’s data shows a slight uptick in UK economic momentum in 2024.

The impact on the Budget

The Q3 GDP data will not be released until next month, thus, the economic backdrop to this month’s Budget is one of economic slowdown since Labour have been in power. Will this make the Budget more pro-growth? Can the government’s initial doom and gloom message be blamed for the slowdown? Chancellor Reeves would be wise to use this Budget to boost UK economic growth, however, she has an almost impossible balancing act to perform: boost growth without weighing on the national debt.

Reasons to be hopeful on trade

The UK continues to import more goods than it exports, however, even within the trade balance data there was reason to be hopeful. Our service exports remain strong, so the overall trade deficit was -£955mn. The trade in goods deficit between the UK and the EU and the UK and the rest of the world narrowed slightly in August and exports of UK services rose at their fastest pace in more than 6 months in August.

GBP/USD heads towards $1.30

The market reaction to the UK data is milder than it should be. The pound has eased against the dollar, after initially staging a mini rally. The market seems determined to push GBP/USD back to $1.30, and today’s data has seen another 20 pip drop in cable. While there are some pockets of good news in the UK economic data, the UK economy can not compete with the US economy on the growth front. The latest Atlanta Fed GDPNow estimate of Q3 GDP in the US is 3.2%, the UK’s growth pales in comparison. This growth differential could lead to a dollar positive yield differential down the line, ands there is now a growing chance that the Fed may pause in November, while the BOE cuts rates. This is quite the turnaround and supports a weaker GBP/USD. Sterling is not alone; the US dollar is the best performing currency in the G10 FX space for another week.

Market moves

FTSE 100 futures are also pointing to a weaker open later today. Elsewhere, volatility has increased dramatically in Chinese shares this week. They have fallen more than 3% on Friday, as the market waits for the update on Beijing’s fiscal plans, which is scheduled for release on Saturday morning. 

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