Service sector offers the UK a boost

Strong performance by the service sector contributed to a slight growth in the United Kingdom's economy in August, newly published figures have shown, after strikes and bad weather had contributed to a downturn the previous month.

Data published by the Office for National Statistics on Thursday showed growth of 0.2 percent in August, following on from a contraction of 0.6 percent in July, but economic observers have warned that high inflation and borrowing costs mean the picture remains difficult for the coming months.

"The economy entered a broad-based slowdown in late summer, which has deteriorated further in recent months," Yael Selfin, chief economist at consultancy KPMG UK, told the Financial Times. "The UK economy continues to feel the strain from elevated prices and high interest rates, with the full impact of past tightening still to be felt."

Chancellor of the Exchequer Jeremy Hunt said the figures were encouraging but that more work remained to be done.

"The UK has grown faster than France and Germany since the pandemic and today's data shows the economy is more resilient than expected," he said. "While this is a good sign, we still need to tackle inflation, so we can unlock sustainable growth."

Business representative group the British Chambers of Commerce also struck a cautious tone, warning that the economy "remains in a precarious position".

"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," said the group's head of research, David Bharier.

Ruth Gregory, deputy chief UK economist at Capital Economics, told The Daily Telegraph newspaper the August recovery was partly fueled by temporary factors, and added that "the economy is not in recession, but it doesn't have much underlying momentum either".

"The drag from higher interest rates will continue to grow. That's why we continue to forecast a 0.2 percent quarter-on-quarter contraction in the third quarter, and a similar-sized decline in the fourth quarter."

Sanjay Raja, from Deutsche Bank, was similarly lacking in optimism, telling the FT he anticipated "growth to turn sluggish through the next few quarters with the UK economy walking a fine line between recession and stagnation".

In September, the UK's central bank, the Bank of England, held interest rates at 5.25 percent — their highest in 15 years — after a run of 14 consecutive rises.

One of the bank's rate-setters, Swati Dhingra, has warned that high interest rates are hitting the most vulnerable the hardest, and that much of their impact has not yet been felt.

"The economy's already flatlined and we think only about 20 percent or 25 percent of the impact of the interest rate hikes have been fed through to the economy," she told the BBC, adding that "younger, less educated people" were those most likely to feel the pinch.