Economy looks set to avoid recession despite August contraction

Britain’s economy shrank by 0.1% in August, but a better-than-previously thought performance in July is expected to help the UK avoid recession.

The Office for National Statistics (ONS) said economic growth picked up in August to 0.3% on a three-month basis – which is seen as less volatile than monthly data.

It revised up month-on-month growth to 0.4% in July, from the 0.3% previous estimate, suggesting a solid start to the third quarter, which should offset the weak August performance.

Experts said the three-month data suggests the UK will eke out growth overall in the third quarter.

This would mean the UK avoids a technical recession, following the 0.2% contraction in the second quarter.

David Cheetham, chief market analyst at XTB, said: “Following the contraction seen in the second quarter, this means that another negative reading for the third quarter is not at all likely, although growth remains tepid at best.”

The ONS figures showed robust expansion in the services sector helped offset a drop in manufacturing activity.

Services output grew 0.4% in the three months to July, while manufacturing dropped 0.4% and construction edged 0.1% higher.

Rob Kent-Smith, head of GDP at the ONS, said: “Growth increased in the latest three months, despite a weak performance across manufacturing, with TV and film production helping to boost the services sector.”

The pound was 0.4% higher at 1.225 US dollars after the data, but continued to weaken against the euro, down 0.1% to 1.111 euros.

But the monthly GDP figures showed a painful August for the economy, with services output flat-lining, manufacturing output falling 0.7%, agriculture down 0.1% and construction the only bright spot with a 0.2% rise.

Economist Howard Archer said the UK had also suffered a tough September, with closely-watched sector surveys suggesting all three main parts of the economy fell in September.

He said: “The economy looks to have had a very challenging and difficult September, and there is a very real possibility GDP could have contracted over the month, despite some stockbuilding occurring ahead of the October 31 Brexit date.”

However, the July upward revision means he is pencilling in growth of 0.4% overall in the third quarter.

The Bank of England last month forecast growth of 0.2% in the third quarter.

There has been mounting speculation over whether the Bank would look to cut interest rates to boost flagging growth at its next meeting in November.

The latest ONS three-month growth data has eased this pressure on the Bank, according to experts, though it may still be forced to react should the UK hurtle out of the EU with no deal on October 31.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Revisions paint the economy’s recent performance in a better light, undermining the case for the MPC (Monetary Policy Committee) to rush ahead and cut Bank Rate before the Brexit path is known.”

Trade figures also out from the ONS on Thursday revealed Britain’s goods and services trade deficit narrowed by £13 billion to £4.6 billion in the three months to August as the UK imported fewer goods.

Imported goods fell £9.2 billion to £118.8 billion in the three months to August.

The trade in goods deficit narrowed by £12.5 billion to £28.4 billion, according to the ONS.