Newsflash: UK economy returns to growth in August
The UK economy returned to growth in August, as activity picked up after a worst-than-expected slump in July.
GDP rose by 0.2% in August, the Office for National Statistics reports, which matches City expectations.
The services sector grew by 0.4% in August, the Office for National Statistics reports, but there was a contraction in the production sector and in construction.
However, July’s GDP report has been revised down to show a fall of 0.6%, worse than the 0.5% first estimated.
Key events
KPMG fined record £21m over Carillion audit failures
Britain’s accounting regulator has fined KPMG a record £21m for audits of Carillion, the builder that imploded in 2018 and prompted a root and branch review of auditing standards.
“The number, range, and seriousness of the deficiencies in the audits of Carillion during the period leading up to its failure was exceptional and undermined that credibility and the public trust in audit,” said Elizabeth Barrett, executive counsel for the Financial Reporting Council (FRC).
“This is reflected in the financial sanction imposed on KPMG LLP, the highest ever imposed by the FRC.”
UK GDP: Political reaction
The health of the economy will be a key factor in the next general election campaign, with the IMF warning this week that the UK will be the slowest-growing nation in 2024.
This morning, chancellor of the exchequer Jeremy Hunt has welcomed the pick-up in GDP in August, saying:
“The UK has grown faster than France and Germany since the pandemic and today’s data shows the economy is more resilient than expected. While this is a good sign, we still need to tackle inflation so we can unlock sustainable growth.”
But Labour shadow chancellor Rachel Reeves says:
“Under the Conservatives, Britain’s economy remains trapped in a low growth, high tax cycle that is leaving working people worse off.
“Labour will get our country building again so we can boost growth, make working people better off and get Britain’s future back.”
Apollo to buy Wagamama owner in £506m deal
In the City, the owner of eatery chain Wagamama is being taken over by a US private equity firm in a £500m+ deal.
The Restaurant Group (TRG) has agreed to be bought by a vehicle owne and anaged by Apollo Global, at a price of 65p per share – a 34% premium to its closing price last night.
That values TRG at approximately £506m.
Apollo says it has closely followed TRG over many years and believes it is:
…a high quality and leading company in the casual dining market with an attractive portfolio of concepts and brands and an experienced management team with a clear vision and strategy for the future direction of TRG.
TRG has been hit by soaring energy and raw material prices over the last 18 month or so.
Last month, it agree a deal to sell its Frankie & Benny’s and Chiquito chains to Cafe Rouge owner Big Table Group.
TRG’s chair, Ken Hanna, also recently agreed to step down after growing pressure from activist investors.
Here’s NIESR, the independent research institute, on this morning’s UK GDP report:
Today’s ONS figures suggest that monthly #GDP grew by 0.2 per cent in August, following a fall of 0.6 per cent in July, driven by increased output in the services sector – particularly in the professional, scientific and technical activities, and education subsectors – which
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— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
was partially offset by declines in production and construction sector output. #GDP increased by 0.3 per cent in the three months to August relative to the previous three month period; however, with higher-frequency indicators for September pointing to declining output in
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— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
the major sectors as well as muted spending, it is unclear whether we can expect overall #growth in the third quarter of this year.
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📈Stay tuned as our full analysis will be out shortly⬇️https://t.co/k40Ii3Afea
— National Institute of Economic and Social Research (@NIESRorg) October 12, 2023
Hussain Mehdi, macro & investment strategist at HSBC Asset Management, warns that the UK faces an “elevated recession risk”, despite GDP rising 0.2% in August.
Mehdi explains:
“A sequential pickup in growth in August was widely expected following the prior month’s weather and strike-related disruption. However, more contemporaneous economic indicators could paint a picture of an economy flirting with recession amid tight monetary policy and persistently high inflation.
We believe there is a good chance the Bank of England is done with its hiking cycle and that rates are more likely to remain higher-for-longer in the UK given sticky wage growth.
After a poor July, the UK economy bounced back in August, says Neil Birrell, chief investment officer at Premier Miton Investors.
But, Birrell also warns there is a real risk of recession, saying:
Like a number of other economies, the UK economy continues to confound not just the worst, but most expectations in remaining relatively robust.
The Fed has indicated it will proceed carefully on policy and the Bank of England must do the same as it balances the inflation versus growth equation. Recessionary risk remains real, but the damage that could be done by ongoing high inflation is a threat.”
Capital Economics: UK still heading into recession
August’s pick-up in GDP will not prevent the UK economy contracting over the third quarter of 2023, fears City consultancy Capital Economics.
Ruth Gregory, their deputy chief UK economist, predicts the UK economy will shrink in the July-September quarter, and again in October-December.
That would mean two consecutive quarters of contraction – the technical definition of a recession.
Gregory explains:
The 0.2% m/m rise in real GDP in August, following July’s 0.6% m/m contraction will raise hopes that the economy has escaped a recession.
But some of the strength of GDP in August was due to temporary factors and the timelier survey measures of activity point to a drop in real GDP in September.
So we are sticking to our below-consensus forecast that the economy will shrink by 0.2% q/q in both Q3 and Q4.
The British Chambers of Commerce fears the UK economy is still in a precarious state.
David Bharier, head of research at the BCC, says:
“With GDP growing by 0.3% in the three months to August, and by 0.2% on a monthly basis, the UK economy is holding up but remains in a precarious state. The production sector in particular has seen worrying data revisions showing stark monthly falls in growth.
“Our research is clear about the issues UK firms are facing – three years of economic shocks, high inflation and interest rates, skills shortages, and trade barriers with the European Union. Consequently, most SMEs report no increase in their investment plans.
“Businesses need to see a strategic vision for the long-term framework for investment in the UK. Recent policy announcements around projects, such as HS2, will have generated more uncertainty for businesses searching for stability.”
ICAEW: UK uncomfortably close to recession
Although the UK has returned to growth, the economy is still weak, warns Suren Thiru, economics director at ICAEW.
Thiru says high interest rates are hurting growth, meaning the UK economy will remain “uncomfortably close to recession” into 2024.
“This disappointingly weak return to growth points to an economy fraying at the edges as inflation and higher interest rates hinder businesses and consumers.
“August’s GDP increase largely reflected the reversal of the squeeze on July’s activity in services from poor weather and strike action.
“With inflation, higher taxes and the lagged impact of previous interest rate rises weighing heavily on consumer demand and business activity, the UK is likely to remain uncomfortably close to recession well into next year.
“These underwhelming GDP figures provide further evidence that higher borrowing costs are hurting the economy, making an interest rate rise in November less likely.”
Now here’s a funny thing.
The education part of the UK economy grew by 1.6% in August, after a fall of 1.7% in July where there were two days of industrial action by teachers in England.
You might remember, though, that schools were actually closed across England, Wales and Northern Ireland through August, while Scotland’s pupils returned to their desks halfway through the month.
The GDP report, though, doesn’t account for holidays.
The ONS says:
Please note that education attendance is considered to be constant over the school year so summer holidays do not reduce the estimate of education output in August 2023.
Looking at the three months to August 2023, compared with the three months to May 2023, education output showed no growth.
The jump in service sector growth was partly driven by the “Professional, scientific and technical activities” part of the economy, which expanded by 1.2% in August.
The ONS says:
The architectural and engineering activities; technical testing and analysis industry was the largest contributing industry, growing by 4.7% in August, followed by legal activities, which grew by 2.3%.
The “Information and communication” part of the economy grew by 0.9% in August, driven by “computer programming, consultancy and related activities” (which grew by 2.4% in August after a fall of 3.1% in July).
ONS: Strong growth in services in August
The economy grew “a little” in August, reports ONS Director of Economic Statistics Darren Morgan.
Morgan says:
“Our initial estimate suggests GDP grew a little in August, led by strong growth in services which was partially offset by falls in manufacturing and construction.
“Within services, education returned to normal levels, while computer programmers and engineers both had strong months.
“Across the last three months as a whole the economy has grown modestly, led by car manufacturing and sales, and construction.”
UK GDP: The key chart
Newsflash: UK economy returns to growth in August
The UK economy returned to growth in August, as activity picked up after a worst-than-expected slump in July.
GDP rose by 0.2% in August, the Office for National Statistics reports, which matches City expectations.
The services sector grew by 0.4% in August, the Office for National Statistics reports, but there was a contraction in the production sector and in construction.
However, July’s GDP report has been revised down to show a fall of 0.6%, worse than the 0.5% first estimated.
BoE’s Dhingra says economy has ‘already flatlined’
A Bank of England policymaker has warned that the UK economy has already flatlined.
Swati Dhingra, a member of the Monetary Policy Committee, has told the BBC that only around a quarter of the impact of the Bank’s 14 interest rates rises have fed through to the economy.
Dhingra, the most dovish member of the MPC, warned:
“The economy’s already flatlined. And we think only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy.
“So I think that there’s also this worry that that might mean that we’re going to have to pay a higher cost than we should be paying.”
Dhingra, who has consistently opposed interest rate rises, also fears that higher interest rates will hurt younger workers and those on lower incomes the hardest.
“The kinds of price increases that we’re seeing, which is energy and food, those will typically impact those people more.
And then the interest rates will also typically impact younger, less educated people more. So….eventually when we come out of all of this, we’re going to see that possibly inequality is going to rise.”
Introduction: UK August GDP report coming up
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
We’re about to learn if the UK returned to growth in August, after a worrying slump in activity in July.
The Office for National Statistics releases its latest estimate of UK gross domestic product at 7am.
City economists predict that GDP rose by 0.2% in August, having shrunk by 0.5% in July when the economy was held back by wet weather and industrial action.
The weather wasn’t much to write home about in August either, and there were more strikes in the NHS and also on the railways
Adam Cole of RBC Capital Markets warns that the “impact of industrial action will again loom large” in today’s data.
Cole adds:
Recovery from July’s strikes will be captured in the August GDP release, but indicators of private sector activity for the month were mixed.
Danni Hewson, head of financial analysis at AJ Bell, warns that the UK is at risk of recession.
“The economy has been remarkably resilient, but cracks are beginning to show, not least in the jobs market as higher borrowing costs and those pervasive high prices continue to weigh on businesses and households.
“But even if the UK did manage to trudge in the right direction in August the lack of pace is of concern, and it doesn’t take much for a shuffle to stumble to a halt and from there it’s one small step towards recession.
Also coming up today
Investors will be watching for the latest US inflation report. It is expected to show a small slowdown, to 3.6% from 3.7% in July.
This will influence the Federal Reserve’s next decision on whether to raise interest rates higher, or not.
DAY AHEAD
The UK GDP is expected to show a YoY growth of +0.5% in August (vs 0% in July).
The ECB monetary policy meeting accounts for the September meeting will be released.
The US Consumer Price Index for September is expected to show that prices rose +3.6% Year-on-Year,…
— TrackRecord Trading (@TradewithTR) October 12, 2023
The agenda
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7am BST: UK GDP report for August
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9am BST: IEA monthly oil market report
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12.30pm BST: ECB publishes its latest monetary policy meeting accounts
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1.30pm BST: US CPI inflation report for August
