The UK economy grew more than expected in August as stronger production activity offset stagnation in services and another decline in construction, offering a measure of resilience amid persistent inflation and rising energy costs.
Gross domestic product increased by 0.1% month-on-month, according to figures released by the Office for National Statistics on Thursday.
Economists polled by Reuters had expected the economy to contract by 0.1%.
A day ago, the IMF predicted GDP growth of 1.3% for the UK this year, up 0.3 percentage points from its most recent update in July.
However, the reading marked a slowdown from the 0.4% monthly growth recorded in both June and July, suggesting that momentum in the British economy remains uneven.
On an annual basis, GDP expanded by 2.1% in August, exceeding economists’ expectations of 1.7%.
The ONS said this was the strongest year-on-year growth reading since August 2022.
Production output rose by 0.8% during the month, while services recorded no growth.
Construction output declined by 0.2%, extending the sector’s recent weakness amid pressure from high mortgage rates.
Activity linked to motor vehicle sales provided some support, while bars and restaurants experienced a 2.7% monthly decline, highlighting the uneven performance across consumer-facing businesses.
UK resilience faces pressure from energy costs
The latest figures add to evidence that the British economy has performed better than initially expected following the outbreak of the Iran war.
The UK recorded the strongest growth among G7 economies in the first half of 2026, with business investment and activity associated with artificial intelligence infrastructure providing support.
Sanjay Raja, chief UK economist at Deutsche Bank, said the economy had “surprised yet again” by expanding in August.
He cautioned, however, that households and businesses could face further challenges as higher energy prices erode disposable incomes and elevated interest rates weigh 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. The UK economy remains the fastest-growing G7 economy,” Raja said.
He also pointed to figures suggesting that GDP growth had reached 1.8% during the first eight months of the year, despite a decline of 95,000 jobs, if HMRC employment data are used.
“Who said productivity growth was dead in the UK?” he said.
Jake Finney, senior economist at PwC, said business investment had helped support economic activity, particularly spending on information and communications technology hardware.
“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,” he said.
Pound rises as markets assess interest rate outlook
The pound rose 0.4% against the US dollar following the GDP release, while yields on UK government bonds, known as gilts, declined across the curve.
The benchmark 10-year gilt yield was last down nine basis points at 5.3364%.
The economic outlook remains complicated by sticky inflation, elevated energy costs and the effects of the Russia-Ukraine war and Iran war on household finances.
As a net energy importer, Britain remains vulnerable to further increases in energy prices.
Financial markets anticipate that the Bank of England will raise interest rates from 3.75% to 4% next month, followed by three additional quarter-point increases in 2027.
The government is also preparing to unveil its closely watched Autumn Budget later this month.
It faces the challenge of adhering to fiscal rules designed to rein in public debt while addressing the pressure of rising living costs.
The post UK GDP grows 0.1% in August, beating forecasts as production offsets weakness appeared first on Invezz