The UK economy showed signs of resilience in August, expanding unexpectedly despite forecasts predicting a contraction, according to official data from the Office for National Statistics (ONS). Gross domestic product (GDP) rose by 0.1 percent in August, down from 0.4 percent in July but surpassing economists’ expectations of a 0.1 percent decline. Additionally, the ONS revised its June growth estimate upward to 0.4 percent from 0.3 percent. Over the quarter to August, GDP increased by 0.7 percent, with the agency now estimating 0.5 percent growth for the quarter ending in June, up from an earlier 0.4 percent.

This upward revision reflects continued strength in the services sector, which expanded by 0.9 percent in the three months to August, up from 0.7 percent in the three months to July. Growth in services was driven largely by gains in the artificial intelligence, legal, and advertising industries. However, production and construction sectors saw declines during the same period.

The data suggests that the UK economy has managed to withstand inflationary pressures stemming from recent geopolitical events, notably the conflict in the Middle East. Throughout the first half of 2026, the UK recorded the fastest economic growth rate among G7 nations.

Liz McKeown, director of economic statistics at the ONS, noted that the robust services sector growth helped offset falls in other areas, contributing to the overall positive GDP results. The figures come ahead of Chancellor John Healey’s first budget announcement scheduled for October 28.

Healey expressed cautious optimism, stating that despite the global challenges posed by conflicts in the Middle East and Ukraine, the latest figures demonstrated Britain’s economic resilience. Nonetheless, a surge in UK government bond yields linked to the Middle East tensions has raised concerns among economists that the chancellor’s fiscal headroom could be reduced to approximately £12 billion, fueling speculation about potential tax increases.

International bodies have also adjusted their growth forecasts upward. The International Monetary Fund recently revised its UK growth projection for 2026 to 1.3 percent, up from 0.8 percent earlier in the year. Deutsche Bank’s chief UK economist, Sanjay Raja, highlighted the sustained strength of the UK’s economic performance but warned of possible challenges ahead, including rising inflation, tax hikes, and higher interest rates.

Inflation is expected to rise sharply in the final months of 2026, potentially peaking above 4 percent in early 2027, according to the Bank of England. While the central bank left interest rates unchanged at 3.75 percent last month, market observers anticipate that rate increases may be necessary to contain inflation and maintain economic stability, possibly beginning as soon as the upcoming November 5 monetary policy meeting.

Some analysts suggest the Chancellor’s planned budget may seek to minimize growth disruptions, with Pantheon Macroeconomics forecasting a smaller economic impact than seen in the previous year. Tomasz Wieladek, an economist at T Rowe Price, signaled that multiple interest rate hikes may be required to achieve the Bank of England’s 2 percent inflation target over the medium term.

Following the GDP release, yields on the ten-year UK government bond declined modestly by 0.07 percentage points to 5.34 percent, reflecting easing oil prices. The FTSE 100 index remained largely flat, while the pound appreciated against the US dollar, trading 0.42 percent higher at $1.32.