The UK economy expanded by 0.4% in the second quarter, outpacing forecasts and providing an unexpected boost to Prime Minister Andy Burnham ahead of his first budget in October.
Growth was driven primarily by the services sector, alongside strong investment in technology equipment and gains in industries tied to artificial intelligence. Manufacturing order books reached their highest level since November 2024, while major purchase sentiment hit a five-year high, according to the latest data from the Office for National Statistics.
Consumer confidence showed signs of stabilization, with the GfK index rising to -14 in August from -17 in July. Retail sales volume growth over the past year was the strongest in five years, though July saw a 0.9% decline excluding automotive fuels. The three-month period ending in July still posted a 4% year-over-year increase in sales.
The S&P Global services Purchasing Managers' Index climbed to a six-month high of 52.8 in August, up from 52.1 in July, signaling continued expansion. Meanwhile, the economy grew by 0.3% in June alone, reinforcing the positive trend.
Finance Minister John Healey faces a complex fiscal landscape. Public sector borrowing for the first four months of the 2026/27 financial year exceeded projections by a couple of billion pounds, though revisions for May and June showed a combined £7.5 billion reduction in borrowing. An unexpected budget deficit last month stemmed from inflation-linked government expenditures, such as staff costs, offsetting robust income tax receipts.
Inflation is projected to exceed 3% in the coming months, while rising global energy prices tied to geopolitical tensions in the Middle East and potential increases in borrowing costs pose risks to the outlook. Analysts warn that sustained high inflation could pressure household budgets and corporate margins.
Thomas Pugh, chief economist at RSM, noted that while the economy has shown resilience, policymakers may need to temper expectations. "If we're not careful, we might have to stop talking about resilience and actually start talking about a reasonable economic performance this year," he said.
