The UK economy returned to growth in August with a very modest 0.2% rise in GDP.
While it represented a turnaround from July’s 0.6% fall, it does not appear to show there is enough strength in the economy to be confident a recession can be avoided.
It is also unlikely to prompt members of the Bank of England’s monetary policy committee to take a more hawkish stance and raise rates further.
Stephen Payne, portfolio manager at Janus Henderson, commented: “The growth was driven by the services sector with production and manufacturing in decline. This tallies with what we are hearing from companies on the ground. The monthly data is very volatile at the moment, impacted by both weather and strikes.
See also: Rising bond yields: A one-off adjustment, or a warning light for investors?
“The third quarter overall looks set to be about flat. This data is not really market moving given it was in-line but will on balance probably be mildly reassuring. The debate about whether the UK economy slips into recession or not continues.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “The UK eked out growth in August, but only just, demonstrating how the burden of high borrowing costs and the wider cost-of-living crisis is still weighing hard on consumer and company sentiment. The picture being painted by this numbers is of an economy only just grinding forward, with the services sector accounting for any growth while production and construction activity has fallen sharply.
“We still haven’t felt the full effect of previous rate hikes, and so the prospects of recession are still looming on the horizon with so little respite expected on sideswiped budgets.”
See also: Unexpected fall in inflation opens door to Bank of England rate hold
Hussain Mehdi, macro and investment strategist, at HSBC Asset Management, added: “A sequential pickup in growth in August was widely expected following the prior month’s weather and strike-related disruption. However, more contemporaneous economic indicators could paint a picture of an economy flirting with recession amid tight monetary policy and persistently high inflation.
“We believe there is a good chance the Bank of England is done with its hiking cycle and that rates are more likely to remain higher-for-longer in the UK given sticky wage growth,” he continued.
“Overall, at HSBC AM, we believe there is an elevated UK recession risk meaning a cautious view on UK equities is warranted, especially for domestically-focused small-caps stocks.
“However, we do see some positives coming from the defensive characteristics of UK large cap indices, which remain relatively cheap and under-owned in global portfolios. Upside risks to oil prices could also provide scope for outperformance of the energy-heavy FTSE 100.”
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