UK GDP Preview: Growth Could Surprise Negatively in August

Consensus expects the economy to have contracted by -0.1% m/m in August following a gain of 0.4% in July. Recall that July’s outturn (Figure 1) was better than markets had been expecting with growth boosted by the services sector, computer programming, and a spending boom in AI and cloud computing activities.

The service sector in particular had boosted growth in July, namely professional services, administration, and information and communication with outsized month on month gains. It is likely that those strong monthly sector gains are reversed in August dragging down overall GDP growth.

Evidence of a potential slowdown in activity during August has been mixed. Retail sales were better in August, rising 0.5% m/m despite the strong headwinds faced by households in the shape of higher petrol prices and higher energy bills following July’s increase in the Ofgem price cap. July’s retail sales were likely boosted by promotions, the hot weather and the World Cup. Business confidence is also dipping ahead of the upcoming Autumn Budget, leading to spending caution among firms.

The resilience shown by households to higher energy costs could be explained, as some retailers have suggested, by changing consumers attitudes, with some households only partially filling their tanks. Moreover, households also appear to be reducing savings to carry on spending. So far in 2026, we have seen the household saving rate fall from 9.5% to 9.0%. Beyond the summer months it is likely that rising inflation and higher mortgage costs will weigh on household budgets. Slower wage growth and falling employment numbers are also likely to weigh on consumers.

We expect inflation to remain above target throughout out this year and next but not to become entrenched. As we have argued in recent UK commentary, much of the near-term inflation increase comes directly from energy, including an anticipated substantial increase in the Ofgem price cap in January of next year. So far, broader price pressures, wage responses and longer-term inflation expectations remain relatively contained. As such, we continue to expect the BoE to keep rates unchanged at 3.75% but await further guidance from the Bank.

That said, the market is already pricing in a 90% chance of a hike in November but this week’s speeches from a number of MPC members should provide some indication of how the Bank sees growth and inflation developing in the medium term. As we have also pointed out, a hike in policy rates will also come at a time when existing government spending plans imply a prolonged fiscal consolidation.

With estimates of the neutral interest rate – the rate that neither slows nor stimulates the economy –  somewhere between 3% and 3.5%, the current rate of 3.75% is already restrictive and will weigh on demand in the economy and ultimately prices.

Figure 1: 3 months to July 2026 compared to 3 months to April 2026

Source: Datastream/CE