The UK economy grew by 0.1% in August 2025, following a decline in July, largely driven by volatile manufacturing activity. This modest rebound keeps the economy on track for approximately 0.2% growth in Q3, with ING noting that annual GDP is now forecast at 1.5% for 2025.
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Despite these encouraging figures, ING warns that the short-term resilience will not prevent the Office for Budget Responsibility (OBR) from downgrading its economic assessment in the upcoming Autumn Budget. According to the report, this adjustment will create a £25 billion annual shortfall relative to the March Spring Statement.
The recent strength in the economy has been supported by a material rise in government spending, with real-terms departmental budgets increasing by 4% this year, up from almost 3% last fiscal year. Growth in government-related sectors has outpaced the wider economy, and increased public sector hiring has offset private sector job losses.
However, ING notes that these tailwinds are expected to fade in 2026. Factors including downgrades to productivity forecasts, higher gilt yields, and policy reversals will likely constrain government flexibility. "Despite political pressure, that likely means the government will be unable to materially deviate from its previous spending plans," the report states. This slower growth in departmental budgets, combined with rising taxes, is expected to create a headwind for economic growth next year.
The analysis underlines the challenge facing Chancellor Rachel Reeves as the government prepares the Autumn Budget: while short-term resilience offers some relief, structural fiscal pressures and limited room for discretionary spending could weigh on the economy in 2026.
James Smith, ING Developed Markets Economist, UK, emphasises the careful reading needed for monthly figures: "We're always reticent to read too much into these volatile monthly figures… Generally, though, the economy is performing a little better than expected a few months ago."
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