UK economy set to contract after strong start to summer, say experts

The UK economy is forecast to have shrunk in August on the back of a decline in the services sector, according to experts.

The Office for National Statistics will unveil the latest monthly UK economic growth data on Thursday October 15.

Economists have said the economy is likely to have contracted in August in a “correction”, after stronger-than-expected showings in June and July.

In June, the UK economy grew 0.3% as hospitality and leisure firms received a boost from football fever and prolonged hot weather.

UK gross domestic product (GDP) had been widely expected to plateau but unexpectedly grew by 0.4% in July following a boost from the services industry and businesses increasing the use of AI.

However, experts have said the positive start to Andy Burnham’s leadership as Prime Minister is likely to have stumbled in the latest data.

Robert Wood, chief UK economist at Pantheon Macroeconomists, predicted the latest statistics will reveal a 0.3% decline in August.

He predicted all the main parts of the economy are likely to report weaker output, with the key three service sectors – professional services, administration, and information and communication – showing notable weakness.

The service sector had reported a particularly strong July, rising by 0.6%, as it benefited from strong demand for AI and cloud computing services.

Mr Wood said: “The ‘big three services’ – which together account for 19.7% of GDP – had a stonking July, with the strongest monthly growth since April 2022.

“The crucial judgment for August is how much of that surge has unwound.”

Data is also likely to show the manufacturing sector roughly flatlined for the month, with growing output from some factories offset by weakness in the automotive sector.

Thomas Pugh, chief economist at RSM UK, predicted a shallower decline of 0.1% for August.

He stressed however that the weaker monthly performance should not “obscure the broader trend of resilience”, forecasting growth of between 0.4% and 0.5% for the third quarter of 2026 as a whole.

He said there is still significant uncertainty over near-term economic growth as rising inflation threatens to weigh on businesses and consumers.

“The outlook beyond the summer is more difficult,” Mr Pugh said.

“Inflation is likely to rise to around 4.5% early next year, unemployment will probably trend back above 5%, and the Budget may add to uncertainty in Q4.

“Together, those pressures are likely to slow growth sharply in the final quarter of this year and ensure a slow start to 2027.”