Barclays sees UK growth holding firm despite inflation pressure

Barclays reports that UK business activity strengthened in August, outpacing expectations, as the flash composite Purchasing Managers' Index climbed to 52.5, surpassing the 51.5 forecast. Services sector growth, up 1 point from July, played a key role in this surge, driven by improved domestic demand. Manufacturing output, however, decelerated by 1.7 points to 51.2, affected by rising costs and geopolitical uncertainty.

Barclays forecasts a 0.2% quarter-on-quarter GDP growth for the third quarter, with risks to this projection leaning towards the optimistic side, owing partly to the positive second-quarter performance and robust investment in ICT equipment.

Retail sales dipped 0.5% in July, aligning with expectations, after two strong months of growth in May and June, which retailers linked to favorable weather and promotions. Considering a three-month period, retail sales increased by 1.1%. Non-food retailers noted that they had advanced promotions into June this year, which may have impacted sales in July.

Unemployment remained constant at 4.9% on a three-month average basis in June, matching Barclays' prediction, but 0.1 percentage point higher than the consensus forecast from the Bank of England and July's Monetary Policy Committee expectations. Employment levels on the three-month measure decreased by 6,000 from May to June, with July payroll data suggesting a 13,000 contraction.

Vacancies declined by 4,000 over the three months ending July, consistent with a slowdown in private-sector wage growth of 0.1 percentage point to 2.8% on a year-over-year basis.

Inflationary pressures are mounting, with headline consumer price inflation rising by 0.3 points to 2.9% year-on-year in July. Barclays attributes this uptick to the latest Ofgem energy price cap increase of 13% quarter-on-quarter. Core inflation remains steady at 2.6% year-on-year. The bank has revised its annual average inflation forecast for 2027 upwards to 2.5%, an increase of 0.1 percentage point, driven by a higher energy price trajectory, while maintaining its 2026 forecast at 3.0%.

Public sector net borrowing for the current fiscal year is in line with the Office for Budget Responsibility's March Economic and Fiscal Outlook, with cumulative borrowing through July at £56.7 billion, around £2 billion more than the OBR's projection. Barclays anticipates full-year borrowing of £120.4 billion, which is £5 billion higher than the OBR's estimate.

Currently, Barclays has not announced any plans for next week's Jackson Hole symposium, nor does it have knowledge of which Monetary Policy Committee members might attend. However, the bank anticipates at least one member's presence.