​UK GDP edges higher as services stall and trade deficit widens

​​​UK economy posts modest growth in August

​The UK economy expanded by 0.1% in August, meeting analyst expectations but failing to generate any real excitement among investors. The figure matched forecasts precisely, suggesting the economy continues to plod along rather than sprint forward. This modest uptick follows a revised contraction of 0.1% in July, which had previously been reported as flat.

​The three-month growth rate held steady at 0.3%, indicating the economy remains stuck in a low-growth environment. For traders watching UK markets, this reinforces the narrative of an economy that's neither strong enough to spark inflation concerns nor weak enough to prompt immediate policy intervention. The Bank of England (BoE) will likely view these figures as confirmation that their current stance remains appropriate.

​Market reaction to the gross domestic product (GDP) release was notably muted. Sterling held firm around $1.34 against the US dollar, reflecting traders' view that the data contained few surprises. The lack of volatility suggests the figure was largely priced in ahead of the announcement, with currency markets focused on other drivers.

​The GDP data arrives at a crucial time for the UK economy. With inflation pressures easing but growth remaining sluggish, policymakers face a delicate balancing act. The modest expansion suggests the economy is resilient enough to avoid recession but not robust enough to justify aggressive policy tightening.

​Services sector hits a wall

​The services sector, which accounts for roughly 80% of the UK economy, showed no growth in August. This marked the second consecutive month of stagnation, a worrying signal for an economy heavily reliant on consumer-facing businesses. Retail, entertainment and recreation sectors all struggled, weighing heavily on overall services performance.

​Consumer-facing industries bore the brunt of the weakness. Households appear to be tightening their belts, with discretionary spending taking a hit. This pattern suggests that despite falling inflation, consumers remain cautious about their finances. Rising mortgage costs and squeezed real wages continue to limit spending power across key sectors.

​The services stagnation stands in stark contrast to the post-pandemic recovery pattern. Earlier in 2024, services had been a bright spot, but this momentum has clearly faded. For traders watching share prices of consumer-facing companies, this trend demands close attention as it could signal further earnings headwinds.

​Business services fared slightly better than consumer-facing segments, but even here the picture remains mixed. Professional services and financial activities showed some resilience, but not enough to offset broader weakness. The divergence between business and consumer services suggests structural challenges rather than temporary factors.

​Business demand provides crucial support

​While consumer-facing services struggled, business demand emerged as an unexpected source of strength. Rental and leasing activities expanded by an impressive 5.3% in August, marking the strongest growth since 2020. This surge helped offset declines elsewhere and prevented a more severe economic contraction.

​The rental and leasing boom reflects businesses adapting to changing economic conditions. Rather than making large capital investments in uncertain times, companies are opting for more flexible arrangements. This shift in corporate behaviour provides valuable insight into business confidence levels and investment decisions.

​Production industries showed signs of stabilisation, with output falling 0.3% in the three months to August. While still negative, this represented a smaller decline than the previous period. The moderation in the pace of contraction suggests manufacturing may be finding a floor, though a meaningful recovery remains elusive.

​The manufacturing sector continues to grapple with weak global demand and supply chain adjustments. Brexit-related trade friction adds another layer of complexity, particularly for exporters to the European Union (EU). For those interested in trading commodities linked to UK manufacturing, these trends merit close monitoring.

​Trade deficit widens on weak EU exports

​The UK's underlying trade gap widened to £5.2 billion for the three months to August, driven primarily by a sharp 5.3% drop in exports to the EU. This deterioration in the trade balance represents a significant headwind for economic growth and underscores ongoing challenges in UK-EU trade relations.

​EU export weakness stems from multiple factors. Demand across the continent remains subdued, with Germany and other major economies struggling with their own growth challenges. Additionally, post-Brexit trade friction continues to complicate cross-Channel commerce, adding costs and administrative burdens for UK exporters.

​The widening trade deficit puts downward pressure on sterling, though forex trading markets appeared relatively sanguine about the figures. The pound's resilience around $1.34 suggests currency traders are focusing more on interest rate differentials and global risk sentiment than trade flow data.

​Import levels remained relatively stable, indicating domestic demand hasn't collapsed despite economic headwinds. However, the persistence of a large trade deficit means the UK continues to rely on capital inflows to balance its external accounts. This dependency makes sterling vulnerable to shifts in investor sentiment.

​Bond markets rally as fiscal concerns mount

​Benchmark 10-year gilt yields fell for a fifth consecutive day following the GDP release, putting UK government bonds on course for their longest winning streak since early August. The rally reflects investor appetite for safe-haven assets amid economic uncertainty and fiscal policy concerns.

​The Institute for Fiscal Studies delivered a stark warning alongside the GDP figures. Chancellor Rachel Reeves needs a £50 billion buffer to meet fiscal rules without resorting to further tax rises or spending cuts. This sobering assessment highlights the limited room for manoeuvre facing the government as it attempts to balance growth objectives with fiscal sustainability.

​Gilt market dynamics remain heavily influenced by BoE policy expectations. With growth remaining sluggish, traders are pricing in a cautious approach to interest rate decisions. The central bank faces pressure to support growth while ensuring inflation doesn't resurface, a challenging balancing act that continues to shape bond market sentiment.

​Corporate winners and losers emerge

​Individual company performance provided stark contrasts to the broader economic picture. Whitbread shares plummeted 8.5% after the Premier Inn owner reported weaker profit figures and lowered guidance for its German operations. The move highlighted the challenges facing consumer-facing businesses in the current environment.

​Whitbread's struggles reflect broader pressures on the hospitality sector. Rising costs, subdued consumer demand and operational challenges in European markets combined to disappoint investors. The sharp share price decline serves as a reminder that company-specific factors can outweigh broader market trends.

​On the positive side, Videndum shares surged 25% after the professional equipment supplier confirmed it would meet lending covenant requirements. The rally demonstrated how companies successfully navigating the current environment can deliver substantial returns for investors. Those looking to buy shares must carefully assess individual company fundamentals rather than simply following macroeconomic trends.

​The divergence in corporate performance underscores the importance of stock selection in the current market. While the broader economy muddles through, individual companies face vastly different prospects depending on their sector exposure, competitive position and financial strength.