The outcome for the UK economy overall was a growth of 0.1% in August. This small uptick goes a long way to offset the drop we experienced in July. This increase is largely due to volatility in the manufacturing sector and is an indication of a fight back that was probably stronger than anyone could have hoped for. The Office for Budget Responsibility (OBR) is widely expected to be forced to downgrade its economic forecast. This recent development creates major implications for the government’s long term fiscal outlook.
The recent data indicates that the annual Gross Domestic Product (GDP) forecast for the UK stands at 1.5% for the current year. Economists widely predict the economic growth will cap at about 0.2% in the third quarter. That’s an increase from a lackluster gain of 6,000 jobs in August. This surprising economic performance is hiding a much healthier state of the economy than we previously understood. Upward revisions to growth figures from late last year play into this rosy outlook.
The hit-or-miss character of the manufacturing sector was a big driver behind this most recent growth number. As we have seen during the past few months, unpredictable changes in output can have significant impacts on national economic growth. Although manufacturing has experienced recessions and renewals, it is still one of the important forces shaping the UK’s economic geography.
Outside of manufacturing, government-related sectors have posted stronger, more consistent annual growth than the overall economy. These real-terms departmental budgets are up 4%—continued growth from the nearly 3% growth seen last fiscal year. UK economy Government spending has increased dramatically, supporting the strength of the UK economy. This unprecedented growth has provided a much needed lifeline from an unexpected economic crash.
For all the good news, huge challenges are already cresting over the horizon. The OBR’s expected downgrade is projected to create a £25 billion gap in the government’s budget when compared to estimates made during the Spring Statement in March. This funding gap may impact funding for other appropriations and their future spending plans.
Looking beyond the current reassessment of policy, there remain strong headwinds to economic growth from government policy after the expected forthcoming Autumn Budget. Still, analysts are forecasting that departmental budgets no longer will grow so quickly, even in the next fiscal year. This marked slowdown would put a major positive drag on growth prospects as the economy moves into 2026.