The UK economy expanded by 0.1% month-on-month in August 2026, exceeding expectations for a 0.1% contraction but slowing from growth of 0.4% in both June and July. Manufacturing and mining activity provided the main support, while services output stagnated and construction recorded another monthly decline.

Annual GDP growth strengthened to 2.1%, its highest rate since October 2022, up from 1.8% in July and above forecasts of 1.7%. The figures provide a more resilient picture of the UK economy than markets anticipated, although the uneven performance across sectors raises questions about the strength and sustainability of growth.

For currency markets, the data could offer some support to the British pound by reducing immediate concerns about economic contraction. However, the outlook will also depend on inflation, Bank of England policy expectations and whether the weakness in services and construction persists.

Market Snapshot

• Monthly GDP: +0.1% in August, against expectations of a 0.1% contraction.
• Previous growth: Monthly expansion slowed from 0.4% in both June and July.
• Annual GDP: Growth accelerated to 2.1%, the strongest since October 2022.
• Production output: Increased 0.8%, supported by manufacturing and mining.
• Manufacturing: Rose 1.2%, providing a key contribution to production growth.
• Services: Recorded no overall growth as gains in wholesale and retail trade were offset by declines elsewhere.
• Construction: Fell 0.2%, marking a fourth consecutive monthly decline.

UK Economic Outlook: Manufacturing Supports Growth as Services Stagnate

The August GDP figures highlight an economy that is still expanding, but with momentum becoming increasingly uneven. Monthly growth of 0.1% was modest, yet the result exceeded expectations and suggests that economic activity remained more resilient than anticipated.

Production output rose 0.8%, with manufacturing increasing 1.2% and mining and quarrying advancing 1.4%. These gains helped offset a 1.2% contraction in water supply, sewerage and waste management.

Services output, which represents a major part of the UK economy, showed no growth. A 2% increase in wholesale and retail trade was offset by a 1.7% decline in administrative and support services and a 2.7% fall in food and beverage services. The lack of overall services growth suggests that stronger production has yet to translate into broad-based economic momentum.

Construction remains another area of concern. Output declined 0.2%, extending its contraction to four consecutive months. New work fell 0.7%, while repair and maintenance increased 0.4%, leaving the sector under continued pressure.

The stronger annual growth rate of 2.1% provides a more encouraging longer-term comparison. Nevertheless, the divergence between production, services and construction means that future GDP releases will be important in determining whether the economy is entering a more sustained recovery or simply experiencing uneven monthly fluctuations.

Bullish Scenario: Stronger Growth Supports Sterling

The pound could benefit if the stronger-than-expected GDP reading improves confidence in the UK’s economic outlook. The return to positive monthly growth, combined with annual expansion of 2.1%, may reduce concerns that the economy is moving towards contraction.

If manufacturing activity remains resilient and services output returns to growth, expectations for overall economic performance could improve. This may support sterling, particularly if stronger activity encourages markets to reassess the likelihood of interest-rate cuts by the Bank of England.

Under this scenario, the pound could gain against currencies whose economies face weaker growth prospects. However, a sustained advance would likely require confirmation from subsequent economic releases rather than relying on one monthly GDP figure.

Bearish Scenario: Weak Services and Construction Limit Recovery

Sterling could come under renewed pressure if the weakness in services and construction proves persistent. These sectors’ performance suggests that the economy continues to face underlying challenges despite stronger production output.

If future data shows that household-facing services, business activity and construction remain subdued, the annual GDP improvement may offer limited reassurance about the outlook for domestic demand.

A weaker growth trajectory could also increase expectations of monetary easing by the Bank of England, potentially reducing the pound’s relative yield appeal. In this scenario, the August figures would be viewed as a temporary improvement rather than evidence of a broad-based economic recovery.

British Pound Forecast: Modest Growth Offers Support, but Risks Remain

The near-term outlook for sterling is cautiously balanced. The GDP figures exceeded market expectations and delivered a stronger annual growth rate, providing a potential source of support for the currency. However, monthly growth slowed sharply from the 0.4% recorded in June and July, while services stagnation and continued construction weakness highlight the economy’s uneven performance.

The pound’s direction will depend on whether subsequent data confirms that economic momentum is stabilising. Stronger services activity and continued production growth could improve sentiment towards sterling. Conversely, further deterioration in domestic demand or a shift towards more accommodative Bank of England policy expectations could limit its gains.

The August report therefore provides a positive surprise, but not yet clear evidence that the UK economy has entered a stronger and more sustainable growth phase.

Market Outlook: What to Watch Next

Upcoming GDP releases: Further monthly growth will help determine whether August’s positive result marks a stabilisation in economic activity.

Services-sector performance: A return to growth would strengthen the case for a broader recovery, given the sector’s importance to the UK economy.

Manufacturing and production: Continued industrial resilience could help offset weakness elsewhere, while a reversal in production would increase downside risks.

Construction activity: A fifth consecutive monthly decline would reinforce concerns about investment and building activity.

Inflation and Bank of England policy: The interaction between economic growth and price pressures will influence expectations for future interest-rate decisions and sterling.

Sterling market sentiment: Traders will assess the GDP figures alongside interest-rate differentials, global dollar movements and developments in other major economies.

Currency Hedger View

Currency Hedger views the August GDP report as a modestly positive development for the UK outlook, with growth exceeding expectations and annual expansion reaching its strongest rate since October 2022. However, the absence of services growth and the continuing decline in construction suggest that the economy remains uneven rather than firmly established on a stronger growth path.

Businesses with sterling exposure should monitor upcoming economic releases and Bank of England communications when assessing future exchange-rate risks. Companies receiving revenue in pounds or making payments to UK suppliers may benefit from considering alternative sterling scenarios when planning cash flow, budgeting costs and managing international currency exposure.

Currency Hedger monitors foreign exchange markets alongside broader commodity and macroeconomic conditions, helping businesses assess and manage their international currency exposure.

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Analysis: Louis Roche, Today Markets

Disclaimer: This analysis is for informational and educational purposes only and does not constitute investment, financial or trading advice. Foreign exchange markets are subject to significant risk, and forecasts are conditional scenarios rather than guarantees of future performance. Businesses should assess their individual circumstances and risk exposure before making financial decisions.