"Goldilocks" zone for UK as economy grinds out growth in August

(Alliance News) - The UK economy returned to growth in August, according to new figures from the Office for National Statistics on Thursday, though only just, as the cost-of-living crisis continued to weigh on the country.

Despite the meagre expansion, stock market investors rejoiced on Thursday morning, with the FTSE 100 index up 0.8% and the mid-cap FTSE 250 up 0.7%.

A return to growth that is neither too strong nor too weak raised hopes that the Bank of England will hold off from fresh interest rate hikes at its next monetary policy meeting in November.

Sterling was trading at USD1.2300 on Thursday morning, a touch lower than USD1.2309 at the London equities close on Wednesday.

The ONS estimates that gross domestic product rose 0.2% in August from July, after contracting by a revised 0.6% in July from June.

August's reading was in line with FXStreet-cited market consensus. July's decline was downwardly revised from 0.5% shrinkage.

Susannah Streeeter, head of money and markets at Hargreaves Lansdown, said the numbers painted a dismal picture of an economy "only just grinding forward".

"At the very most, it appears the UK is in a period of stagflation, with the economy stagnating while inflation stays elevated," she said.

For AJ Bell's Danni Hewson, however, the 0.2% expansion in August could be considered the "Goldilocks of GDP growth" as it was not too hot to suggest the Bank of England has more work to do to slow down the economy but not too cold to suggest its measures have "completely stalled the engine".

Further, the fact that August "stormed back" from July's damp and dismal decline - matching the weather in the UK that month - was testament to the resilience of the UK economy in Hewson's eyes.

That being said, Hewson noted that with growth so slim, a recession in the UK was beginning to feel "almost inevitable".

"The full extent of increased borrowing costs has yet to be felt and as temperatures cool and thermostats are eyed warily there's a real sense that economic resilience is fraying," she said.

On Tuesday, the International Monetary Fund marginally upgraded its growth forecast for UK GDP this year to 0.5%, from 0.4%, but downgraded its forecasts for the UK's economic growth next year.

It had previously pointed towards 1% growth for 2024, but reduced this forecast to 0.6% amid pressure from higher interest rates, which represents the lowest predicted growth rate across the G7.

interactive investor's Victoria Scholar criticised the IMF's figures for failing to take into account the recent statistical revisions from the ONS which show that the UK economy recovered much quicker than previously estimated from the pandemic.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said it was "touch and go" as to whether UK GDP dropped marginally in the third quarter of the year.

"GDP would have to rise by 0.2% on a month-to-month basis again in September, for a quarter-on-quarter contraction to be avoided. That looks just out of reach, given that two-thirds of the increase in August reflected increases in output in the education and health sectors, as strike disruption faded, rather than underlying momentum," he said.

Nonetheless, Tombs said his base case remains that GDP rises gradually in the final quarter of the year and into 2024.

"Prices now are rising substantially less quickly than wages, and households' disposable incomes will be squeezed only gently by higher interest rates - at least in aggregate - because the value of their bank deposits now is only slightly smaller than the value of their debt. Accordingly, households' real disposable income looks set to rise over coming quarters, albeit sluggishly.

"Meanwhile, confidence among both households and businesses has recovered materially over the last six months, now that the energy price shock is in the rear-view mirror and Bank Rate has probably peaked," he said.

The Bank of England will announce its next interest rate decision on November 2. At its last meeting in September, the central bank decided against enacting another lift to UK interest rates in a split decision, maintaining bank rate at 5.25%. It ended a streak of 14 successive hikes since December 2021.

By Heather Rydings, Alliance News senior economics reporter

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