The UK economy unexpectedly grew in August, providing a modest boost for Chancellor John Healey ahead of his first Budget while underscoring the fragile conditions facing businesses and households.

Gross domestic product increased by 0.1% month on month, defying economists’ expectations of a contraction. Output rose by 0.7% over the three months to August, with production providing the main impetus.

Resilience tempered by weak investment

The figures suggest that the economy has continued to expand despite elevated energy costs, high borrowing expenses and geopolitical uncertainty. Industrial production rose by 0.8% in August, while manufacturing output increased by 1.2%.

The stronger-than-expected data has been welcomed by the government. Healey described the performance as a sign of economic resilience ahead of the Budget, which is due later this month.

However, the recovery remains uneven. The British Chambers of Commerce has raised its 2026 growth forecast to 1%, from 0.9%, but expects business investment to fall by 0.2% this year. The group said growth would rely heavily on consumer spending rather than corporate investment.

Pressure builds before the Budget

The improved growth outlook comes as the Chancellor faces a difficult fiscal balancing act. Higher borrowing costs and a reported £5bn defence funding shortfall have narrowed the government’s room for manoeuvre, while market volatility has placed additional pressure on public finances.

Businesses are also preparing for continued cost pressure. A survey of UK finance directors found that profitability and efficiency had become the leading priorities, with 64% identifying inflation and rising costs as major concerns.

At the same time, borrowing by companies is increasing. An HSBC survey found that 56% of businesses with annual turnover above £3m had taken on new borrowing in the past year, while 68% expected to increase staff numbers.

Markets watch inflation and interest rates

The unexpectedly strong economic figures have influenced expectations for interest rates. Sterling rose to around $1.333, while the 10-year gilt yield climbed to 5.38% as investors reassessed the outlook for inflation, rates and government borrowing.

The British Chambers of Commerce expects inflation to peak at 3.6% this year and unemployment to reach 5% by the end of 2026. It has warned that higher household energy bills and possible food-price increases could weigh on demand.

For the government, the August figures offer useful political cover but do not remove the underlying challenges. The economy is growing, yet investment remains subdued, companies are managing rising costs and the Chancellor must convince investors that the Budget will support growth without weakening fiscal credibility.