The UK economy rebounded slightly in August but failed to allay fears that output will contract in the third quarter. Gross domestic product (GDP) rose 0.2 per cent month-on-month, in line with market expectations, after a revised 0.6 per cent contraction in July, data from the Office for National Statistics showed on Thursday.
The recovery partly reflected the disappearance of factors that held back activity in July, mainly large-scale industrial action, with services growing 0.4 per cent. However, manufacturing contracted by 0.8 per cent and construction by 0.5 per cent, both worse than economists had expected.
The Bank of England expects growth of just 0.1% in the third quarter, but doubts remain. To achieve steady growth in the third quarter, GDP needs to grow by at least 0.21 percent in September.
Sam Tombs, an economist at Pantheon Macroeconomics, said the target seemed "out of reach" given that much of the increase in manufacturing activity in August was driven by a drop in strikes rather than the economy's underlying momentum. "The latest survey points to a weather-related drop in retail sales in September and a further decline in manufacturing output."
A contraction in the third quarter could mean that the UK economy is already in recession. With key PMI indices showing warning signs and unemployment rising, Bloomberg Economics expects the UK economy to contract for a year starting in the final three months of 2023.
The pound held onto gains after the GDP data and is set for a seventh straight day of gains, its longest winning streak since July 2020.
Bank of England rate-setter Swati dingra warned that the UK economy "has flattened out" ahead of further interest rate pain. She said the risks of a recession in the UK were now balanced.
"We think only 20 or 25 per cent of the impact of the rate hike is fed through to the economy," she said. "So I think there's a concern that it could mean we're going to have to pay higher costs than we should."
Yael Selfin, UK chief economist at KPMG, said: "The outlook for the UK economy remains bleak as the impact of high interest rates continues to be felt." "Today's data are consistent with our assessment that the economy entered a broad-based slowdown in late summer and has worsened further in recent months."
Money markets are pricing in a slightly more than 50% chance that the Bank of England will raise interest rates again in the coming months. However, rates are expected to remain high for an extended period as officials continue their efforts to bring inflation back to target.
Chancellor of the Exchequer Jeremy Hunt said: "Since the outbreak began, the UK economy has grown faster than France and Germany, and today's figures show that the economy is more resilient than expected." "While this is a good sign, we still need to tackle inflation so that we can achieve sustainable growth."
However, the IMF sees the UK coming in last for growth next year, although its forecasts do not include the latest revisions.