Chancellor says he can balance the books as UK economy grows 0.1%

The UK economy grew by 0.1% in August, a better result than economists expected and a boost for Chancellor John Healey before his first Budget in under two weeks. The Office for National Statistics said output expanded despite rising energy prices and borrowing costs. Economists had expected the month to be flat or to shrink slightly.

Mr Healey, speaking from the International Monetary Fund annual meetings in Bangkok, welcomed the figures as a sign of resilience. He said the Budget would need to meet the moment, recognising pressure on businesses and households from global shocks, including conflict in the Middle East and Ukraine, trade tensions, higher pump prices and mortgage costs. He said he would take steps to reinforce the economy's resilience and give people breathing space from the cost of living and cost of business pressures where possible.

Monthly figures are volatile. Over three months, growth was 0.7%, after upward revisions to earlier months. One analysis projected the recent pace at an annualised rate of 2.7% to 2.8% and said the first half was the strongest in the G7. Another put annual growth at 1.8%, above the estimated underlying rate of about 1.5%. The UK has defied predictions that it would be among the countries hardest hit by the Iran war and the energy shock, though energy prices are still expected to weigh on activity in the coming months.

Not all parts of the economy are growing. Construction shrank in August and had contracted for four months in a row according to political debate. Hospitality businesses are under pressure from the cost of doing business. But computer programming, accounting and bookkeeping, research and development, legal services and advertising were strong. Economists noted that these sectors may be early adopters of artificial intelligence, offering early evidence that AI could lift productivity.

The Chancellor used the IMF meeting to argue that the UK is sticking to its fiscal plans. The IMF upgraded its UK growth forecast for the year and backed the government's deficit reduction plan, which aims to cut the deficit from around 5% of GDP to 1.3% by 2031. The Fund said other G7 countries are not planning similar reductions: three plan larger deficits and two are roughly flat. The endorsement was seen as unusual praise for the UK, which had been under pressure in bond markets.

Mr Healey still faces a tough Budget. He said spending would be controlled and that where the government wants to do things, it must pay for them within existing budgets. That could mean no top-ups for public sector pay, which is being squeezed by inflation. He also wants to persuade markets to bring down the UK's elevated borrowing costs.

Political reaction was divided. Labour figures said the IMF recognition was a vote of confidence in the government's economic approach since 2024, but argued delivery was still needed and fiscal rules had to be followed. Conservative critics said borrowing had risen sharply, with two recent Budgets adding more than £120bn, and pointed to tax rises. They called for spending cuts, including savings from the welfare budget and the Chagos deal, and argued that Labour's jobs tax was hurting hospitality and youth employment.

The IMF meetings in Bangkok also brought geopolitics into the foreground. The Russian finance minister attended the G20 session, an unusual presence. The Chancellor said he made clear in the room that now is not the time to dial down sanctions on Russia, but to step up pressure on Vladimir Putin and support for Ukraine. He announced almost £20m for critical repairs at the Chernobyl nuclear power station, which Russian drones have damaged. He also argued for an energy ceasefire as the best way to stabilise markets, including diesel prices.

Back in the UK, the growth figures are unlikely to end the pressure on households. The average five-year fixed mortgage rate is now 5.99%, a full percentage point higher than when the Iran war began. About 2.3 million households are likely to see fixed deals end next year, and how much more they pay will influence whether the economy can keep up its recent better performance. For the Chancellor, the August figures and IMF endorsement provide a better backdrop, but the Budget decisions in two weeks remain high stakes.