UK economy shrinks 0.3% in August

This followed growth of 0.1 per cent in July, revised down from what was initially reported as 0.2 per cent by the Office for National Statistics.

The main contributor to the fall in gross domestic product was a 1.8 per cent drop in production in August after a fall of 1.1 per cent in July. 

According to the ONS this was mainly because of a 1.6 per cent decrease in manufacturing during the period. 

There has been a continued slowing in the underlying three-month growth, where GDP also fell by 0.3 per cent in the three months to August compared with the three months to May 2022.

A 5 per cent slowdown in arts, entertainment and recreation activities and a 1.3 per cent drop in human health and social work activities were the largest contributors to the 0.1 per cent drop in overall services in August, after growth of 0.3 per cent in July. 

Growth of 1.2 per cent in professional, scientific and technical activities was responsible for partially offsetting the fall in services. 

Elsewhere in the economy, construction grew by 0.4 per cent in August, with the ONS saying this increase came solely from a 1.9 per cent increase in new work, as repair and maintenance saw a decrease of 2 per cent.

Output in consumer-facing services fell by 1.8 per cent in August, after growth of 0.7 per cent in July.

One industry expert described the figures as disappointing but no surprise. 

Marcus Brookes, chief investment officer at Quilter Investors said we can expect a further reduction in September’s results as they will include an unexpected bank holiday and 10 days of national mourning. 

“While this figure is not what the country wants to see, it won’t make much of a difference to the path we are already on. The Bank of England will continue to increase its base rate as it battles to tame runaway inflation. 

“Whether the Conservatives’ stance against the so-called “anti-growth coalition” actually ends up producing growth is yet to be seen. What is likely though is that due to a combination of rising mortgage bills, higher energy bills and ever-increasing inflation the next few months are likely to prove difficult for everyone including government, businesses and households.”

Brookes added that for investors a lot of the angst is already priced into the markets, “albeit with some additional volatility”.

“The biggest risk, therefore, is that investors flee from the market at just the wrong time and miss out on the opportunities that volatile times bring. 

“Looking for quality businesses is going to be increasingly important as these might be the ones that can ride out this short to medium term volatility and profit from any eventual market rebound,” Brookes said.

Commenting on the figures, Chancellor of the Exchequer Kwasi Kwarteng said the government’s “mini” Budget will address the challenges the country faces.

“Countries around the world are facing challenges right now, particularly as a result of high energy prices driven by Putin’s barbaric action in Ukraine.

“That is why this government acted quickly to put in place a comprehensive plan to protect families and businesses from soaring energy bills this winter.

 “Our Growth Plan will address the challenges that we face with ambitious supply-side reforms and tax cuts, which will grow our economy, create more well-paid skilled jobs and in turn raise living standards for everyone.”

Knife edge

For Mark Robinson, managing director of Southampton-based Albion Forest Mortgages, it feels like the economy is “balancing on a knife edge”.

Robinson said: “I am confident that the British people will get through this together, but our government has shown that they don't know what they are doing and are completely out of touch. If the government doesn't get a handle on things, it isn't just borrowers who will suffer with rising rates. 

“Mortgage brokers, estate agents, solicitors, builders, letting agents, developers, surveyors, and many many more sectors will struggle.”

Elsewhere in the economy, sterling had a turbulent night last night after there was confusion over the length of the Bank of England’s gilt-buying programme.

jane.matthews@ft.com