UK economic growth slows more than expected

UK economic growth was weaker than expected in August, but growth in previous months was revised slightly higher.

Gross domestic product was flat in August compared to the preceding month, the Office for National Statistics revealed on Wednesday, when economists had expected growth of at least 0.1%.

However, GDP grew 0.7% in the three months to August compared to the three months to May, keeping the rolling three-month basis unmoved. This was higher than expected after growth in each of June and July was revised up by 10 basis points.

The ONS update follows a cut in the International Monetary Fund's forecast for UK growth to 1.1% this year from the previous 1.3%, along with a warning that the country's public finances were among the weakest in the world.

Industrial production growth continued to recover, growing 0.2% in August versus the 0.1% from the month before, with year-on-year output was up 1.3% versus the 1% forecast.

This was despite another 0.2% decline in manufacturing production in August, when a 0.1% improvement had been anticipated. Manufacturing output expanded 1.3% since a year ago, more than the forecast but down from the revised 1.4% growth in July.

The ONS revealed the index of services was disappointingly flat in August compared to July but was up 0.5% in the three months to August, as expected.

Construction output shrank 0.7% month-on-month on a seasonally adjusted basis, with yearly growth sliding to just 0.3% versus the 1.2% expected and the previous month's revised 2.8%.

With three-month rolling GDP growth unchanged at 0.7% this was the fastest pace of growth since February last year, said economist Andrew Wishart at Capital Economics, with the upward revision to July putting the economy on course for a 0.6% quarterly expansion in Q3, which would make it the strongest quarter since Q4 2016.

"While the strength of GDP growth does reflect some underlying improvement, it has been flattered by a rebound in construction as the sector made up for time lost to poor weather at the start of the year. And even if the economy did record a 0.6% quarterly expansion in Q3 as we expect, it would still be on course for a weak performance in 2018 as a whole. Our forecast is for growth of 1.3%, which would be the weakest annual expansion since the financial crisis," Wishart wrote.

August's figures were "somewhat gloomier" than the earlier summer months, showing the economy could be losing momentum as we move into the autumn, said Ben Brettell, economist at Hargreaves Lansdown. "Worryingly the dominant service sector has experienced a significant slowdown in growth over the past year or so, with an emerging trend for growth of around 1.5% year on year."

He said the overall picture was still one of "muddling through" and what while the strong growth earlier in the summer is likely to reassure policymakers that the recent interest rate rise was warranted, the Bank of England will be "hoping to see the momentum maintained as Brexit approaches" as markets are still pencilling in a further rise around the middle of next year – "though clearly a disorderly Brexit would pose a significant risk to that outlook".

With the three-month GDP growth rate stable, Howard Archer at the EY Item Club lifting his forecast for third quarter growth to 0.6% quarter-on-quarter in the third quarter, from the previous expectation of 0.5%.

Archer noted that purchasing managers’ surveys for services, manufacturing and construction pointed overall to the economy softening a little at the end of the third quarter.

"We think there is a very real risk that growth will slow in the fourth quarter due to appreciable Brexit and political uncertainties weighing down on business investment and also limited willingness for companies to place major contracts. Additionally, still stretched consumers may rein in their spending after seemingly splashing out at an increased rate over the third quarter," he said.