Barclays sees UK growth holding firm despite inflation pressure

British business activity showed stronger growth than anticipated in August, with the flash composite Purchasing Managers’ Index increasing to 52.5, surpassing the 51.5 forecast. The services sector contributed to this growth, with the services PMI rising to 52.8, up 1 point from the previous month, driven by enhanced domestic demand conditions.

Manufacturing output, however, declined 1.7 points to 51.2, affected by rising costs and geopolitical uncertainties. Barclays maintained its forecast for third-quarter GDP growth of 0.2% quarter-on-quarter, noting that risks to this forecast are biased towards the upside, supported by the strong performance in the second quarter and significant investment in ICT equipment.

Retail sales dropped 0.5% month-on-month in July, aligning with expectations, after two consecutive months of growth in May and June, attributed to favorable weather and promotional activities. However, on a three-month basis, retail sales increased by 1.1%. The unemployment rate remained unchanged at 4.9% on a three-month moving average basis for June, matching Barclays' forecast but slightly higher than the 4.8% consensus and the Bank of England’s Monetary Policy Committee's July forecast.

Employment decreased by 6,000 from May to June, while payrolls data indicated a 13,000 reduction in July. Job vacancies fell by 4,000 over the three months to July, consistent with a 0.1% year-on-year slowdown in private-sector wages. Barclays increased its 2027 annual average inflation forecast to 2.5%, a 0.1 percentage point rise, due to a higher energy price path, while keeping its 2026 forecast at 3.0%.

Public sector net borrowing for the current fiscal year aligns with the Office for Budget Responsibility’s March projections, with cumulative borrowing reaching £56.7 billion, approximately £2 billion more than the OBR’s forecast. Barclays anticipates total borrowing of £120.4 billion for the year, $5 billion higher than the OBR’s estimate.

The bank did not reveal any plans for next week's Jackson Hole symposium or confirm which Monetary Policy Committee members might attend.