Growth of 0.1 per cent in August keeps the recovery on track, but employers warn that resilience is coming at the cost of margins, hiring and investment, reports Group Editor Andrew Palmer

Britain’s economy grew by just 0.1 per cent in August, according to the latest figures from the Office for National Statistics, extending a run of better-than-expected performance even as business leaders warned that the momentum may prove hard to sustain.

The modest monthly rise follows exceptionally strong growth in June and July, and leaves the economy 0.7 per cent larger over the three months to August. With Chancellor John Healey’s Autumn Budget now less than a fortnight away, the figures were greeted with cautious welcome rather than celebration, and with a familiar chorus of demands for help on costs.

A services-led recovery

The expansion has been driven entirely by services, with professional, scientific and technical activities and information and communication doing the heavy lifting. Production and construction both contracted over the period. Computer programming and consultancy has now been the single largest contributor to three-month growth for six consecutive months, according to analysis from the British Chambers of Commerce.

For Anna Leach, Chief Economist at the Institute of Directors, the picture is one of resilience, though unevenly spread. Her organisation’s own surveys point to pockets of strength in technology and renewables, as well as firms finding new markets and investing in innovation. “But the IMF is right to warn that this resilience remains fragile,” she added.

The International Monetary Fund has recently upgraded its UK growth forecast and singled out the Government for decisive action on borrowing. The Institute for Fiscal Studies, however, has cautioned that the fiscal plans rest on ambitious assumptions about public sector productivity, with the tax burden set to climb further.

A tale of contrasts

The Confederation of British Industry described an economy pulling in different directions. Demand varies sharply from sector to sector; firms are investing but being forced to choose carefully which projects to back; and softer recruitment sits uneasily alongside persistent shortages of key skills.

“Activity has proved resilient as businesses adapt to a challenging environment, but often at the expense of margins and future expansion plans,” said Ben Jones, the CBI’s Senior Lead Economist, who expects rising inflation and tighter financial conditions to bring a more subdued end to the year.

The Institute of Economic Affairs struck a blunter note. Its Chief Economist, Dr Valentin Boboc, acknowledged the economy’s ability to withstand pressures on energy and shipping, but argued that growth of 0.1 per cent was “hardly cause for celebration” when living standards still need a sustained lift.

Energy, rates and National Insurance

Rising energy prices, fuelled by the continuing conflict in the Middle East, featured prominently in the business groups’ concerns. Stuart Morrison, Research Manager at the BCC, said August’s lukewarm figure showed many sectors were still struggling to make headway against global headwinds.

The Chambers want three immediate steps from the Chancellor: a cut in employer National Insurance contributions for workers under 25, action on energy bills and business rates, and more consistent support for exporters. The CBI’s wish list overlaps closely, calling for lower business electricity costs, relief on employer National Insurance and reform of business rates, while urging the Chancellor to avoid adding fresh costs at a time of limited fiscal headroom.

Little immediate relief for households

Nor are families likely to feel the benefit soon. Kevin Brown, savings expert at the mutual Scottish Friendly, noted that stronger growth does not automatically ease household budgets. Inflation and the cost of living remain stubborn, and robust economic data could strengthen the case for interest rates staying higher for longer – unwelcome news for borrowers, if rather better for savers shopping around for competitive rates.

The economy, then, is still moving forward. The question for the Chancellor on Budget day is whether he can keep it moving without asking those doing the pushing to carry any more weight.