Britain’s economy grew at its fastest pace in four months during August, yet the improvement has done little to reverse a prolonged and deepening crisis in the labour market.
Data tracked by S&P Global showed the UK’s private sector expanded strongly in August, despite persistent concerns around business costs and rising inflation pressuring firms across the country.
Growth was driven largely by a boost in the services sector, which offset a slowdown in manufacturing and pushed overall activity higher than the previous month’s reading.
The overall purchasing managers’ index for the private sector came in at 52.5, above the 50 threshold that separates growth from contraction, and ahead of July’s score of 52.2.
However, manufacturers saw slower momentum, with the sector’s reading slipping from 51.9 to 51.5, highlighting an uneven recovery across different parts of the British economy.
Despite the headline growth figures, job losses have now persisted across 23 consecutive months, the longest such streak recorded since PMI surveys began in 1996.
The unemployment rate has climbed from 4.4 per cent to 4.9 per cent since Labour took office in mid-2024, underlining the scale of pressure facing workers throughout the country.
Chris Williamson, chief business economist at S&P Global, said the rate of job losses was “moderating” and that firms felt “more upbeat than at any time since the war began.”
“The expansion is being helped by sunny weather and tech investment, though as expected we have seen some softening of growth in the manufacturing sector as precautionary stock building cools,” Williamson said.
“It’s clear, however, that the Middle East and concerns over domestic government policy continue to have a damaging effect,” he added, pointing to ongoing headwinds weighing on business confidence.
“Most worryingly, cost pressures remain high, largely due to energy prices and supply disruption linked to the Middle East conflict alongside high staffing costs,” Williamson warned.
Labour’s decision to hike the minimum wage and national insurance contributions for employers at its first budget in 2024 has hammered businesses and triggered a significant slowdown in hiring across sectors.
According to a cost calculator from the British Chambers of Commerce, a typical small firm’s cost stack has risen some 70 per cent since 2016, with more than a quarter of that increase coming since the 2024 Budget.
Rob Wood, chief UK economist at Pantheon Macroeconomics, said improved business sentiment suggested the economy could outperform the Bank of England’s growth expectations in the third quarter.
“We estimate the average PMI over July and August is consistent with quarter-to-quarter GDP growth of 0.2 per cent in the third quarter, down from 0.4 per cent in the second quarter but still above the Monetary Policy Committee’s forecast for a rise of just 0.1 per cent,” Wood said.
“Granted, some of the ‘[Andy] Burnham boost’ could yet fade as Budget uncertainty ratchets up in the Autumn, while higher energy prices will continue to drag on demand,” he cautioned.
The results paint a complex picture of a UK economy showing genuine resilience in activity while continuing to shed jobs at a historically unprecedented pace, leaving policymakers with difficult decisions ahead.