After two consecutive months of economic stagnation, the UK economy finally saw a recovery in August this year.
According to data released by the UK Office for National Statistics on Friday, the UK's Gross Domestic Product (GDP) increased by 0.2% month-on-month in August, in line with economists' expectations.
Prior to this, the UK economy saw no growth for two consecutive months in June and July. The data shows that in the three months ending August, the UK economy grew by 0.2%, slowing down from the 0.5% growth rate in the three months ending July.
After the release of the economic data, the pound's exchange rate against the US dollar rose slightly by 0.05%, now at $1.3076.
Focusing on the upcoming Autumn Budget
James Smith, an economist for developed markets at ABN AMRO, pointed out that although the UK economy performed strongly at the beginning of this year, this momentum may be difficult to sustain:
"If the monthly GDP data is credible, the UK economy's performance in the first few months of 2024 was encouraging, but the latest data indicates that this strong growth momentum is weakening. Overall growth in the third quarter is also expected to be just 0.2%."
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The economic rebound in August was mainly due to the recovery of several industries. Among them, the UK service sector achieved a moderate growth of 0.1%, while industrial output and construction industry grew by 0.5% and 0.4%, respectively.
UK Chancellor of the Exchequer Rachel Reeves welcomed this data, stating that restoring economic growth is the top priority for the new government. She said: "Although change will not happen overnight, we will go all out to fulfill our commitment and revive the economy."Reeves is expected to present her first Autumn Budget by the end of this month, with widespread speculation that the government may fill the estimated £22 billion (approximately $29 billion) fiscal gap through tax increases and spending cuts. Reeves still needs to strike a balance between taxation and expenditure to avoid a negative impact on economic growth.
Smith pointed out that if the UK Treasury hopes to gain budget room through strong economic performance at the beginning of the year, they may be disappointed:
"The key lies in the Office for Budget Responsibility's (OBR) forecast for the economic outlook. Like the Bank of England, the OBR is also unlikely to draw overly optimistic conclusions from the GDP data so far this year."
In the meantime, the government is trying to boost public confidence through the "National Recovery" plan. Investment strategist Lindsay James said that Reeves faces a delicate balance and needs to ensure that fiscal policy does not suppress future economic growth:
"As interest rates begin to decline, the responsibility for fiscal decisions has shifted from the Bank of England to Chancellor of the Exchequer Reeves. She must find the appropriate balance between stimulating the economy and maintaining fiscal health to avoid the risk of overcorrection."