United Kingdom Economic Forecast

After modest growth in Q2, GDP fell 0.5% month on month in July—more than twice as steep a fall as markets had forecast. Output fell in services, manufacturing and construction, though a tough base effect and industrial action were partly to blame, and monthly GDP data has been highly volatile recently. As such, underlying momentum was likely stronger than the headline fall suggested. That said, PMI data then pointed to deteriorating private-sector operating conditions in August amid elevated borrowing costs. In September, the UK agreed to rejoin the EU’s over USD 100 billion Horizon Europe research program in 2024, boding well for UK research output. Further sector-by-sector deals with the EU are possible ahead, though a return to the Single Market or customs union appears unlikely, particularly as opposition leader and current election favorite Kier Starmer has ruled out such a move.

Inflation fell to 6.7% in August from 6.8% in July, below market expectations. That said, inflation was still far above the BoE’s 2% target rate. Inflation is seen trending down from current levels by year-end thanks to a favorable base of comparison, but will still average over double the Bank’s target on high wage growth and the recent rise in energy prices.