LONDON — The UK economy is poised for modest expansion in the third quarter, according to Barclays, which upgraded its outlook despite lingering inflation pressures and mixed labor market signals.
Barclays forecasts third-quarter GDP growth at 0.2% quarter-on-quarter, citing solid carryover from the second quarter and strong investment in information and communications technology equipment. The bank’s assessment follows a rise in the Flash composite Purchasing Managers’ Index (PMI) to 52.5 in August, up 0.3 points from July and exceeding the 51.5 consensus. Services PMI climbed to 52.8, while manufacturing output slowed to 51.2, reflecting divergent sectoral trends.
Retail sales contracted 0.5% month-on-month in July, matching consensus estimates, after gains in May and June driven by favorable weather and promotional activity. Over the three months to July, retail sales grew 1.1%, indicating underlying resilience despite the monthly decline.
The labor market showed signs of softening. The unemployment rate remained at 4.9% on a three-month moving average in June, in line with Barclays’ forecast but 0.1 percentage point above the Bank of England’s Monetary Policy Committee projection. Employment fell by 6,000 from May to June, while payrolls declined by 13,000 in July. Vacancies decreased by 4,000 in the three months to July, and private-sector wage growth slowed to 2.8% year-on-year.
Inflation dynamics remained mixed. Headline consumer price inflation rose to 2.9% year-on-year in July, up 0.3 percentage point from June, driven by a 13% quarter-on-quarter increase in the Q3 Ofgem energy price cap. Core inflation held steady at 2.6% year-on-year. Barclays revised its 2027 annual average inflation forecast up by 0.1 percentage point to 2.5%, citing a higher energy price path, while maintaining its 2026 forecast at 3.0%.
Public borrowing figures also came under scrutiny. Cumulative net borrowing through July reached £56.7 billion, £2 billion above the Office for Budget Responsibility’s forecast. Barclays expects full-year borrowing to total £120.4 billion, £5 billion more than the OBR’s projection.
