UK GDP grew 0.1% in August, beating forecasts of a fall
It leaves third-quarter growth on course to beat the Bank of England's forecast, with a November rate rise already priced and Chancellor John Healey's budget margin still thin.
Key takeaways
Britain's economy grew in August when economists expected it to shrink. The UK Office for National Statistics (ONS) said on Thursday, Oct. 15, that real gross domestic product rose 0.1% from July. A Reuters poll of economists had forecast a 0.1% decline.
Reuters said the figures left growth in the third quarter, July through September, on course to exceed the Bank of England (BoE) forecast of 0.4%. Thomas Pugh, chief economist at RSM UK, said the figures suggested interest rates were not as restrictive as the Bank had assumed. BlueGamma, a firm that tracks rate pricing, found on Wednesday that a rise was already priced.
Reuters called the print a lift for John Healey, chancellor of the exchequer since July, ahead of his first budget, and said he still faced a narrow path to his fiscal rules.
Output slows from summer
Despite beating forecasts, the report showed August was a slower month than the two before it. Output rose 0.4% in both July and June, with the latter month revised up from 0.3%.
August's print turned on factories. Services output was unchanged, against a forecast decline of 0.1%. Manufacturing rose 1.2%, Reuters said, against forecasts of a small decline. The ONS said basic pharmaceutical products and pharmaceutical preparations rose 5.1% and supplied the largest gain in manufacturing. Construction fell 0.2%.
Real GDP beats forecasts
Real GDP grew 0.7% in the three months to August compared with the three months to May. That rolling window is June through August, not the third quarter the BoE forecasts. Newsquawk, a markets news service, had forecast 0.5%. The three months to July were revised to 0.5%, from 0.4%.
Where August was buoyed by factories, the three-month gain was in services, which rose 0.9%. Computer programming, consultancy and related activities grew 5.0%. Reuters reported that programming output was 13% higher so far in 2026.
"The sector breakdown suggests that AI is behind much of the upswing," said Andrew Wishart, senior economist at Berenberg.
August output was 2.1% above August 2025. Reuters said that was the strongest annual reading since October 2022, and, setting aside the rebound from the pandemic, the fastest since December 2019.
A rate rise was priced before the figures
The BoE Bank Rate is currently set at 3.75%, with the committee's next meeting set for Nov. 5. On Sept. 17, policymakers voted 6-3 to hold, with three members wanting a quarter-point increase to 4%. Morningstar wrote on Oct. 1 that a November rise would be the first since August 2023.
As of Wednesday, before the GDP figures were published, BlueGamma put the chance of a rate hike at the BoE's next meeting at 94%.
The ONS put August inflation at 3.1%, up from 2.9% in July. That is 1.1 percentage points above the BoE's 2% target. Services inflation was 3.4%.
Healey's first budget still has little room
By 10:50 a.m. in London, the FTSE 100 was up 0.54% at 10,783, its highest since Sept. 18, according to Reuters. Banks led after Healey restated the government's commitment to fiscal discipline, and Reuters said the growth figures added to the rise.
Reuters said the 10-year gilt yield declined further after his comments, to 5.34%.
"Despite conflicts in the Middle East and Europe hitting people across the world, today's figures offer more proof of Britain's resilience in the face of these global shocks," Healey said of the growth figures.
In an Oct. 5 analysis, global accounting firm EY put UK government headroom - the spare amount by which the government is forecast to meet its fiscal rules - at £11.3 billion, down from £23.6 billion in March.
EY estimated that higher gilt yields accounted for about £10 billion of that narrowing through debt-interest costs. Peter Arnold, EY's chief economist, said headroom of about £11 billion was only around 1% of total tax receipts.
The International Monetary Fund (IMF) on Tuesday raised its forecast for UK growth in 2026 to 1.3% from 1.0% predicted in July. The same update said higher energy prices and long-term interest rates were likely to weigh on growth next year.
That upgrade, along with the better-than-expected GDP figures for August, are the growth figures Healey can cite going into the budget. Neither replaces the thin margin EY measured on Oct. 5.
The UK's next inflation release is Oct. 21, the budget is Oct. 28, and the BoE's rate decision is Nov. 5. The ONS publishes its next GDP estimate on Nov. 12.
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Frequently asked questions
How much did the UK economy grow in August?
The ONS said real GDP rose 0.1% from July, against a Reuters poll forecast of a 0.1% decline.
Is the Bank of England expected to raise rates?
Before the figures, BlueGamma put the chance of a rise to 4% at the Nov. 5 meeting at 94%.
Does the GDP spike give Chancellor Healey more budget room?
Not on its own, because EY's Oct. 5 analysis put his headroom at only £11.3 billion, about 1% of tax receipts.
How did markets react to the figures?
The FTSE 100 index rose 0.54% to 10,783 and the 10-year gilt yield fell to 5.34%
