Britain’s economy showed unexpected resilience in the run-up to the government’s first Budget, with new data and upgraded international forecasts pointing to stronger-than-expected growth despite persistent inflation and higher borrowing costs.

The development is the most consequential UK business story of the day because it gives Chancellor John Healey greater room to manoeuvre while intensifying pressure to explain how the government will fund its spending commitments and restore confidence in the public finances.

Growth defies expectations

The economy expanded by 0.1% in August, according to coverage from the BBC, confounding forecasts of a slight contraction. The result followed a week in which the International Monetary Fund upgraded its assessment of UK growth, reinforcing the view that activity has held up better than many economists expected.

The figures offer political relief ahead of the Budget scheduled for 28 October. Healey described the surprise growth as evidence of the economy’s resilience, while the improved outlook may reduce immediate pressure for emergency measures to support demand.

Inflation and energy risks remain

Stronger near-term growth does not remove the main risks facing households and businesses. Higher energy prices are expected to weigh on the economy next year, while elevated interest rates continue to raise financing costs for companies and consumers.

Airlines are among the sectors warning that sustained inflation could make customers less willing to absorb further price increases, highlighting the fragile relationship between resilient output and household purchasing power.

Businesses remain defensive

Surveys of finance leaders suggest that corporate caution is still widespread. An MHA survey of 400 UK finance directors found that profitability and efficiency were the leading priorities, with 64% identifying inflation and cost pressures as key concerns.

Deloitte’s latest CFO survey similarly identified domestic economic and political uncertainty as the biggest constraint on British competitiveness. Finance chiefs are prioritising cost reduction over expansion while preparing for possible increases in inflation and interest rates.

Budget pressure builds

The improved growth figures may strengthen the government’s negotiating position, but they are unlikely to resolve the fiscal challenge. A think tank has estimated that Healey faces a £35bn gap if he is to meet spending pledges while maintaining his fiscal commitments.

The Chancellor is also expected to face pressure from the banking sector, with banks anticipating higher taxes in the Budget. Any measures that raise business costs could test the confidence reflected in the latest growth data and reinforce the defensive stance already evident among finance directors.

For markets and companies, the central question is whether the economy’s resilience can endure as energy costs, taxation and borrowing expenses remain elevated. This week’s data provide a stronger starting point for the government, but not a guarantee that Britain has moved beyond its period of economic vulnerability.