Britain’s economy is showing unexpected signs of resilience among businesses and consumers, providing an early boost for new Prime Minister Andy Burnham as his government prepares its first budget while facing the risks of higher inflation and strained public finances.
A closely watched survey released on Friday showed Britain’s services sector, the main engine of the economy, recorded its strongest growth in six months. The performance defied expectations for a slowdown and suggested that businesses have maintained momentum despite rising costs and uncertainty linked to the war involving the United States and Iran.
The S&P Global Purchasing Managers’ Index (PMI) for the services sector rose to 52.8 in August, from 52.1 in July. A reading above 50 indicates growth, and the latest figure was stronger than all forecasts in a Reuters poll of economists.
The improvement follows official data showing the British economy expanded by 0.3% in June and 0.4% in the second quarter, with services providing much of the growth.
Britain is now on track to record the fastest economic growth among the Group of Seven advanced economies during the first half of the year, although some economists have warned that seasonal adjustment issues could mean the strong performance is overstated and that growth may weaken later in the year.
Thomas Pugh, chief economist at tax and consultancy firm RSM, said the latest figures could mean Britain was moving beyond simply demonstrating resilience toward achieving a more reasonable level of economic performance.
The Confederation of British Industry (CBI) also reported an improvement in manufacturing sentiment, with its gauge of monthly order books reaching its highest level since November 2024. Export orders were at their strongest in four years.
Official figures have also pointed to growing investment in technology equipment and expansion in industries linked to the artificial intelligence boom, suggesting that AI related activity is beginning to make a visible contribution to the wider economy.
Consumers Become More Confident
Household confidence has also improved.
Market research firm GfK said its consumer confidence index rose to minus 14 in August, from minus 17 in July. Sentiment toward making major purchases reached its highest level since December 2021.
Other surveys from YouGov/Cebr, BRC-Opinium, Barclays and LSEG/Ipsos have similarly shown improving consumer sentiment over the past month.
Retail sales, however, remained mixed. Official data showed retail sales volumes excluding automotive fuel fell 0.9% in July, although the decline followed strong growth in previous months.
Over the three months to July, retail sales were 4% higher than a year earlier, representing the strongest growth on that measure in five years.
Inflation and Public Finances Remain Challenges
Despite the improving economic picture, Burnham’s government still faces significant challenges as Finance Minister John Healey prepares to deliver the administration’s first budget in October.
Inflation remains a major concern. Consumer price growth is expected to rise above 3% in the coming months, while the continuing war involving the United States and Iran could push global energy prices higher and add further pressure to household and business costs.
Friday’s business surveys also showed an increase in corporate price pressures, suggesting that companies may face higher costs in the months ahead.
Public finances present another challenge. The government recorded an unexpected budget deficit in July as inflation related spending, including higher staff costs, offset strong receipts from income tax.
Borrowing during the first four months of the 2026/27 financial year is currently a few billion pounds above the level projected by the official budget forecaster.
However, revised figures from the Office for National Statistics (ONS) have painted a somewhat better picture, with estimates of public sector borrowing revised lower in every month of the year so far. Borrowing estimates for May and June were collectively reduced by £7.5 billion.
The stronger economic data could therefore give Burnham and Healey some additional room as they prepare the October budget, although persistent inflation, higher borrowing costs and pressure on public spending are likely to remain major constraints.
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