By Andy Bruce
MANCHESTER, England, Aug 21 (Reuters) - Britain is showing surprising signs of strength among businesses and consumers, in an early boost for new Prime Minister Andy Burnham, despite the country's vulnerability to high inflation stemming from the Iran war.
A closely watched business survey on Friday showed the services sector — the engine of the economy — recorded its best growth in six months, confounding expectations for a slowdown in a Reuters poll of economists.
Another report showed
consumer confidence hitting a two-year high this month.
While economists still think Britain faces big challenges in the months ahead — its public finances remain strained and borrowing costs could increase further — the recent data nonetheless represent a boon for Burnham and for finance minister John Healey ahead of his first budget in October.
"If we're not careful, we might have to stop talking about resilience and actually start talking about a reasonable economic performance this year," said Thomas Pugh, chief economist at tax and consultancy firm RSM.
ECONOMIC GROWTH AND BUSINESS SENTIMENT IMPROVE
Britain's economy expanded by 0.3% in June and 0.4% over the second quarter as a whole, led by the services sector.
It put Britain on track for the fastest growth among the Group of Seven advanced economies for the first half of this year, although some economists think this may reflect an inadequate seasonal adjustment — which, if borne out, would drag on growth in the second half of the year.
The Office for National Statistics noted strong investment in tech equipment and growth in industries associated with the AI boom, a sign that the impact of this in Britain is starting to become visible in the hard data.
On Friday the S&P Global Purchasing Managers' Index for the services sector rose to a six-month high of 52.8, up from 52.1 in July and above all forecasts in the Reuters poll of economists.
The Confederation of British Industry's gauge of monthly manufacturing order books rose to its highest level since November 2024, bolstered by the strongest export orders in four years.
CONSUMERS GROW MORE OPTIMISTIC
Market research firm GfK said its consumer confidence index rose to -14 in August from -17 in July and its gauge of major purchase sentiment increased to its highest since December 2021.
Other similar surveys from YouGov/Cebr, BRC-Opinium, Barclays and LSEG/Ipsos have all shown an improving mood in British households over the last month.
And while official data on Friday showed a 0.9% drop in retail sales volumes excluding automotive fuels in July, it followed a period of strong growth.
In the three months to July they were 4% higher than a year previously — the strongest growth on this measure in five years.
INFLATION, PUBLIC FINANCES REMAIN FLIES IN THE OINTMENT
The biggest risks to Healey as he prepares his budget are still inflation and the state of the public finances, which are inextricably linked as worries about persistent price rises have pushed the cost of new government borrowing in most advanced economies to near their highest in decades.
Consumer price growth looks almost certain to head past 3% in the coming months, and with no end in sight to the U.S.-Israeli war on Iran it remains to be seen how much further global energy prices can rise.
Friday's PMI surveys showed a pickup in gauges of corporate price pressures.
Britain's government recorded an unexpected budget deficit last month, according to data on Friday that showed government spending linked to inflation — such as staff costs — had counteracted strong inflows of income tax receipts.
Borrowing for the first four months of the 2026/27 financial year is a couple of billion pounds higher than projected by the official budget forecaster, but that picture could change.
The ONS has revised down its estimates for public sector net borrowing compared with the initial reading in every month this calendar year.
Borrowing in May and June has been revised down by £7.5 billion combined.
(Reporting by Andy Bruce; Editing by Hugh Lawson)
