UK economy hands Burnham surprise boost before first budget

Britain is displaying unexpected signs of economic strength ahead of the first budget of new Prime Minister Andy Burnham, despite the country's susceptibility to high inflation resulting from the Iran war, according to Reuters. A recent business survey revealed that the services sector, the backbone of the economy, experienced its best growth in six months, surprising economists' predictions of a slowdown.

Additionally, consumer confidence reached a two-year high this month. While experts anticipate significant challenges in the coming months, including strained public finances and potential further increases in borrowing costs, these recent developments could be a favorable boost for Burnham and Finance Minister John Healey before their first budget in October.

Thomas Pugh, chief economist at RSM, noted that if we're not cautious, we might have to transition from discussing resilience to acknowledging a reasonable economic performance this year. Britain's economy grew by 0.3% in June and 0.4% over the second quarter as a whole, primarily driven by the services sector. This growth puts Britain on pace for the fastest expansion among Group of Seven advanced economies for the first half of the year, though some economists suspect the data may be impacted by inadequate seasonal adjustments, which could hinder growth in the latter half of the year.

Strong investments in technology equipment and growth in AI-related industries indicate that the effects of this growth are starting to manifest in hard data. The S&P Global Purchasing Managers' Index for the services sector reached a six-month high of 52.8, surpassing expectations in the Reuters poll of economists. The Confederation of British Industry's gauge of monthly manufacturing order books also reached its highest level since November 2024, driven by the strongest export orders in four years.

A consumer confidence index from market research firm GfK increased to -14 in August from -17 in July, while its gauge of major purchase sentiment hit its highest since December 2021. However, official data showed a 0.9% drop in retail sales volumes excluding automotive fuels in July, following a period of strong growth. Despite this, retail sales have been 4% higher than a year prior in the three months to July, the strongest growth on this measure in five years.

Inflation and the state of public finances remain the primary risks for Healey as he prepares his budget. Borrowing for the first four months of the 2026/27 financial year is slightly higher than projected by the official budget forecaster, and the Office for National Statistics has revised down its estimates for public sector net borrowing for each month this year.