UK Economy Defies Expectations as Services Growth and Consumer Mood Hit Multi-Month Highs

Early boost for Prime Minister Andy Burnham, though inflation from the Iran war and strained public finances cloud the outlook ahead of October’s budget

LONDON — Britain is displaying unexpected resilience across both business and household activity, delivering an early lift to new Prime Minister Andy Burnham even as the country remains exposed to inflationary pressure generated by the war on Iran.

A closely watched business survey published on Friday showed the services sector — the mainstay of the economy — posting its strongest growth in six months, defying expectations of a slowdown in a Reuters poll of economists. A separate report showed consumer confidence reaching a two-year high this month.

Economists still see significant obstacles ahead, with public finances under strain and the risk of further increases in borrowing costs. Even so, the run of data represents a welcome development for Burnham and for finance minister John Healey before his first budget in October.

“If we’re not careful, we might have to stop talking about resilience and actually start talking about a reasonable economic performance this year,” said Thomas Pugh, chief economist at tax and consultancy firm RSM.

Growth and business sentiment improve

The economy expanded by 0.3% in June and 0.4% across the second quarter as a whole, driven by services. That puts Britain on course for the fastest first-half growth in the Group of Seven, though some economists suspect the figures reflect inadequate seasonal adjustment — a distortion that would weigh on second-half output if confirmed. Canada has yet to publish second-quarter data.

The Office for National Statistics highlighted robust investment in technology equipment and expansion in industries tied to the AI boom, an indication that the phenomenon is beginning to register in hard economic data.

On Friday, the S&P Global Purchasing Managers’ Index for services climbed to a six-month high of 52.8 from 52.1 in July, exceeding every forecast in the Reuters poll.

Households turn more optimistic

Market research firm GfK reported its consumer confidence index improved to -14 in August from -17 in July, with its measure of appetite for major purchases reaching the highest level since December 2021.

Comparable surveys from YouGov/Cebr, BRC-Opinium, Barclays and LSEG/Ipsos have likewise pointed to a brightening mood among British households over the past month.

Official figures released on Friday showed retail sales volumes excluding automotive fuel fell 0.9% in July, though the decline followed a stretch of strong gains. Over the three months to July, volumes stood 4% above year-earlier levels — the fastest growth on that measure in five years.

Inflation and fiscal risks persist

Consumer price growth appears almost certain to exceed 3% in the coming months, and with no resolution in sight to the U.S.-Israeli war on Iran, the trajectory of global energy prices remains uncertain. Friday’s PMI surveys registered an acceleration in corporate price pressures.

The government also posted an unexpected budget deficit last month, according to data released on Friday, as inflation-linked spending including staff costs offset strong income tax receipts.

Borrowing over the first four months of the 2026/27 financial year is running a couple of billion pounds above the official forecaster’s projections, although that assessment may yet shift. The ONS has revised down its estimates of public sector net borrowing from the initial reading in every month this calendar year, with May and June lowered by a combined £7.5 billion.