The UK economy may have nudged forward in August as revealed by the latest GDP figures from the ONS, but the pace of recovery remains sluggish.
As manufacturing gains offset weakness in services and construction, today’s GDP figures highlight a fragile equilibrium, one that leaves the Bank of England facing tough choices ahead. Experts from across financial services share their take on what these data signal for markets, borrowers and long-term investors.
But what are the prospects for UK equities?
Despite ongoing economic uncertainty, many investment managers are highlighting attractive valuation opportunities in UK equities — particularly compared with global markets. Tomorrow, our online Friday Focus will explore “Where next for UK equities?”, featuring insights from leading fund managers to give you a clearer picture of the opportunities and risks ahead. Check in with us tomorrow morning for expert views — and some good news too: it’s certainly not all gloom and doom!
Danni Hewson, Head of Financial Analysis at AJ Bell, said:
“Stuck is the word that the Treasury and chancellor have consistently used to describe how many people feel about the UK economy. Even though the IMF forecast the UK to deliver the fastest growth out of all G7 countries except the US this year, it’s not the kind of growth that improves lives or that the government is hoping for.
“Instead, the pace of growth has been decelerating, with the pre-tariff front loading surge at the start of the year now a distant memory and the massively important service sector feeling the weight of consumer insecurity.
“In August, manufacturing provided a bright spot as the global supply chain continued to rebalance and trade deals restored a degree of confidence, but that rekindling of activity couldn’t fully offset a decline in construction work or a stalled service sector. During the summer holidays, the shock of long, warm and dry days meant many parents didn’t need to spend money to keep their kids occupied – though there was a boost for bars and restaurants.
“Nervousness about the path of rate cuts and constant speculation about potential Budget changes put the brakes on the housing sector, but there was a surge in rental activity, which suggests would-be buyers are still cautious and hoping the government will come up with some kind of carrot that can help aspiring homeowners.
“A single month won’t come close to giving the real picture of what’s going on with the economy, with heightened uncertainty about global and domestic issues a concern in the longer term. The question is how the economy can find a higher gear when consumers are displaying an abundance of caution and businesses are lacking the confidence to move forward.”
Derrick Dunne, CEO of YOU Asset Management, has commented on this morning’s GDP figures from the ONS:
“While it is encouraging to see some GDP growth over the summer what remains clear is significant challenges lie ahead for the UK economy.
“Any growth is going to be helpful to Rachel Reeves ahead of the Budget, but the truth is the growth we have now is not enough to stay ahead of our obligations. This will likely be confirmed by the OBR’s report when it is published alongside the Government’s tax and spend announcements, which looks set to blame the shortfall on poor productivity.
“There is still a rising likelihood now that the public will have to bear the brunt of tax increases in order to shore up the public finances. Where those tax increases come remains to be seen. But until growth and productivity are improved we will continue to face new tax measures that will fundamentally not help the economy get out of its funk.
“For households concerned about what the Budget may contain, it is critical not to make rash financial decisions without seeking professional guidance. Anyone who is unsure about the current outlook and their personal finances should speak to a financial planner.”
Lindsay James, investment strategist at Quilter:
“In the week that the International Monetary Fund gave the UK’s economic growth forecasts a small bump up, today’s GDP figures paint a picture of an economy stumbling to the end of the year after a strong start. Monthly GDP grew just 0.1%, giving a three-month rate of 0.3% – not exactly exciting figures. Markets will have been hoping for signs that the UK can maintain it’s early-year momentum but it appears that has now dissipated just as we approach a crunch Budget statement from the Chancellor. Rachel Reeves will need to find a tonic and quickly if she is to extricate the economy from its current malaise.
“There are a number of obstacles coming down the track for the economy too. The IMF confirmed the UK has an inflation problem and is struggling to get out of it. That will continue to put pressure on the consumer. Meanwhile, both businesses and individuals are fearful of what is coming at November’s budget after Rachel Reeves confirmed tax rises are being looked at. Last year showed just how much impact that uncertainty can have on economic growth and now this year appears as if it will be no different.
“Recent corporate surveys have also pointed to a contraction in the manufacturing sector, with factors cited included US tariff uncertainty, weak client confidence, the higher cost backdrop and even the supply chain effects of the Jaguar Land Rover production shutdown. More worryingly, the service economy which has been the strong part of the UK economy for some time, has also showed signs of slowing with the political and economic uncertainty cited as a headwind for activity in the sector – for the second consecutive month services output is estimated to have shown no growth.
“If this government is about stimulating growth, then this Budget needs to restore some much-needed confidence in the outlook. Tax rises will continue to act as a heavy anchor on the economy, and anything that adds yet more inflationary pressure should be shelved for another day.”
Luke Bartholomew, Deputy Chief Economist, at Aberdeen said:
“The Chancellor may find some modest comfort in the fact that the economy returned to growth in August, but this report does little to shift the outlook for policy or markets. Growth is sluggish and the labour market is still clearly cooling, with private sector wage growth now moderating quite rapidly.
“But with inflation still set to rise further, the Bank of England is very likely to leave interest rates on hold in November. However, significant further rate cuts next year are likely, especially with the budget likely to deliver around £30 billion of fiscal consolidation, which will further weigh on growth and sentiment.”
Kevin Brown, savings expert at Scottish Friendly, said:
“Today’s GDP figures suggest the UK economy may be finding its feet again after a difficult period. Growth, however modest, is a welcome sign that confidence could be slowly returning across sectors. Businesses are investing, and employment remains resilient, which should help sustain momentum into the next quarter.
“For many UK households though, the recovery still feels fragile. Rising living costs and higher borrowing rates continue to squeeze disposable incomes. Families need to see growth translate into lower inflation and greater financial stability before they can feel the benefits in their day-to-day lives.”
Scott Gardner, investment strategist at J.P. Morgan-owned digital wealth manager, Nutmeg, said:
“The UK economy grew marginally in August, but remains firmly stuck in the slow lane. Recent data shows that growth tailed off over the summer and was downgraded in July, disappointing many after a strong start to the year.
“Driving this has been a distinct slowdown in economic activity, with the construction sector particularly weakened and services sector flat during August while the labour market deteriorates. Housing market activity has also been muted with the industry reporting a notable reduction in asking prices and demand over the summer months. For the UK economy to regain momentum, the housing market needs to become unstuck as this drives additional consumption beyond the purchase.
“As the Autumn Budget approaches and the Chancellor increasingly relies on OBR growth projections, this slowdown will concern policymakers and could make all the difference when it comes to tax and spending decisions. Unlocking growth is critical to easing the UK’s financial pressures and putting the economy back on solid ground.”
Jonathon Marchant, Fund Manager at Mattioli Woods, said:
UK GDP numbers for August met analyst expectations, with a +0.1% print. Over the preceding three-month period the economy grew at +0.3%, also in-line with consensus.
This morning’s figures follow a string of downbeat indicators across a range of sectors. With retail sales lower than expected, disappointing house price data and pay growth slowing, we have seen downward pressure on gilt yields in recent days and increased speculation that bond markets may have mispriced the potential for interest rate cuts. Today’s data confirms that higher growth remains elusive, in what has been a prolonged period of mixed signals and false dawns.
Added uncertainty ahead of the budget appears to be impacting confidence indicators and this is likely to be reflected in economic growth numbers further down the line. UK equity bulls will be hopeful that the Chancellor has given herself plenty of time to design a budget that changes the current trajectory, with a greater emphasis on growth.
