16 October 2026: The UK economy unexpectedly grows in August despite fall in consumer spending

Economists and most market practitioners were certain the economy shrank in August, given the growth achieved in the previous two months. They felt the pattern would be unsustainable. However, much to the Chancellor's delight, the UK grew by 0.1%, even though consumer spending fell before John Healey’s first budget, now less than two weeks away.

After petrol and diesel prices rose and higher energy bills hit household spending, the ONS said the consumer-facing services sector fell 0.3% on the month, following a 0.1% decline in July.

Despite the overall services sector showing no growth in August, manufacturing drove the surprise headline improvement, with the wider production sector, including manufacturing, mining and energy generation, up 0.8%. Construction output fell by 0.2%.

Sports, amusement and recreation activities contributed the largest negative, alongside a slump in food and drink services. Analysts said the fall signalled a reversal of an earlier boost from the World Cup and unusually hot weather, or it could reflect households trimming spending.

It is unusual for the entire market to be so wrong about such a major data release, and several large banks' and brokerages' economic departments likely arrived at their offices yesterday with red faces.

Bank of England Monetary Policy Committee members Huw Pill and Sarah Breeden made speeches yesterday, with Pill in particular ‘dialling back’ some of his recent hawkish comments somewhat.

He told his audience in Bangkok, where he is attending the IMF’s semi-annual conference, that he does not share the market view that the Bank will need to hike interest rates four times in the coming twelve months.

"We shouldn't give the impression that because we act now, we are on another staircase, like we saw in 2022 and 2023. It's a different shock," Pill said during a panel discussion hosted by the Bangkok Economic Festival on the sidelines of International Monetary Fund meetings in the city.

Pill said that if the wars in Ukraine and Iran end, or at least have less bearing on geopolitical events, the UK may see slower activity and lower inflation.

Unlike the US Federal Reserve and the European Central Bank, the BoE has kept rates on hold since the outbreak of the US-Iran war in February, but markets see a quarter-point increase after next week's meeting as a near certainty. Pill repeated his concerns that Britain was vulnerable to what he called "insidious" catch-up dynamics in inflation, as workers sought wage rises to compensate for price rises.

"You probably need to have more of a prolonged period of restriction to squeeze that," he said. Higher bond yields in advanced economies probably reflected, at least in part, a rise in the real neutral interest rate needed to stabilise inflation, another factor pointing to the need for higher rates, he added.

Meanwhile, Breeden, the Bank’s Deputy Governor for Financial Stability, said that banks must prepare independent recovery systems in case of successful artificial intelligence-enabled cyberattacks.

According to Breedon, financial institutions can no longer assume that their cyber defences are impenetrable. She said that options for restoring key services across the entire financial system need to be considered.

This concerns so-called bare-metal systems, technical complexes entirely independent of a bank’s main IT infrastructure. They can be deployed if the institution’s core operating systems are compromised.

Breeden spoke at the Institute of International Finance's annual meeting in Bangkok yesterday. She also warned that artificial intelligence has already reached a level where the technology poses a systemic risk to global financial infrastructure.

In her assessment, AI development has increased the risk of larger-scale, more sophisticated cyberattacks. She stressed the importance of basic ‘cyber hygiene’. She called the possibility of a systemically important bank or key infrastructure being paralysed as a result of an attack one of the main causes for concern.

Sterling posted one of its strongest daily gains against the dollar since mid-August, climbing to around 1.3250 as the dollar weakened and UK GDP beat expectations. Against the Euro, the pound was broadly steady, closing near 1.1830.

Retail sales rose 0.8% in September from the prior month, well above the market forecast of 0.3%. However, excluding autos and gasoline, sales rose just 0.2%, with a 6.4% surge in gas station receipts driving most of the headline gain. Control group sales, the measure that feeds into GDP calculations, rose only 0.1%. Bloomberg Economics noted that higher gasoline prices drove most of the increase, meaning consumer demand strength was overstated.

Holiday demand in the U.S. retail market is expected to strengthen in the final two months of the year, despite mounting pressure on household budgets. The National Retail Federation forecasts that November and December sales will rise 4.2% to $1.013 trillion, up from a 3.1% increase a year earlier.

Reuters, citing the National Retail Federation, says shoppers will keep spending during the holiday season, even as they remain cautious about budgets. NRF President and CEO Matthew Shay says the forecast reflects confidence that consumers will keep prioritising year-end purchases.

The group says its projection is based on economic modelling that includes consumer spending, employment, wages and historical retail sales data. The estimate excludes automobile, gasoline and restaurant sales.

Major retailers, including Walmart, Kohl's and American Eagle, have warned of strain on consumer spending ahead of the key holiday period, as higher household costs and inflation make shoppers more selective.

A Deloitte survey of about 4,000 U.S. consumers also points to steady seasonal demand. The survey shows average household holiday spending could rise 4% to $1,654 this year, driven by higher spending among Gen Z and millennial consumers.

Deloitte says shoppers expect retail spending to rise 10% to $988, while holiday activity spending is projected to fall 4% to $666. It adds that 79% of consumers planning to give an experience also intend to pair it with a physical gift.

With U.S. toy prices surging ahead of the holiday shopping season, analysts outlined how tariffs and higher energy, shipping and input costs were pushing shelf prices up faster than in many other consumer categories. We also noted that major toy makers were facing margin pressure from lingering trade-related costs and broader inflation, keeping holiday budgets under strain.

Producer prices surged in September at their fastest monthly pace since early 2022, with increases spreading beyond energy to services, freight transport, and several wholesale trade categories.

The Producer Price Index (PPI) for final demand rose 1.3% seasonally adjusted from August, according to data released on Oct. 15 by the U.S. Bureau of Labour Statistics. That more than doubled the 0.6% consensus estimate among economists surveyed by The Wall Street Journal.

September’s increase was the largest since March 2022, when it rose 1.7%. It followed upward revisions of 0.5% in August and 0.2% in July. Core PPI, which excludes volatile energy and food prices, increased 0.7% month-over-month.

On an unadjusted basis, producer prices rose 6.3% over the 12 months through September, up from a revised 5.6% in August and the largest annual increase since December 2022. Core PPI increased 5.0% year-over-year.

Initial jobless claims for the week ending October 10 rose by 1,000 to 199,000 from the prior week, the Labour Department said yesterday. The four-week average of claims, which smooths out week-to-week volatility, rose by 250 to 198,500.

Jobless-claims data proxy layoffs, and economists watch them closely because they can signal where the job market is headed. So far this year, claims have remained historically low, below 220,000.

The weekly report continues to suggest that most companies are confident enough in the economy and their sales to retain their workers. At the same time, hiring has been sluggish, resulting in a “low-hire, low-fire” job market. Last month, the unemployment rate ticked up to 4.2%, which is still historically low.

Earlier this month, the government said businesses and other employers added just 29,000 jobs in September, down from 133,000 in August and below economists' forecasts.

Yet as population growth slows and immigration into the United States drops, the economy needs to create fewer jobs each month to keep the unemployment rate low.

Despite a broadly healthy labour market, concerns remain that higher borrowing costs and persistent inflation from rising energy prices could push businesses to slash jobs to cut costs.

Earlier this week, the grocery store chain Kroger said it would lay off about 3,000 corporate employees over the next three years. Rival chain Albertson’s, which has already reduced its headcount, said it would cut more jobs.

The total number of Americans filing for unemployment benefits for the previous week ending October 3 fell by 4,000 to 1.71 million, also a historically healthy figure.

The USD was the weakest major currency yesterday, with broad declines against EUR, CHF, GBP and AUD as falling US yields and a sharp correction in AI‑linked equities undermined the post‑CPI Dollar rally.

European Central Bank Chief Economist and Executive Board member Philip Lane has warned that artificial intelligence could weaken workers’ bargaining power and moderate wage growth, even before broad changes in employment become visible.

Lane made the remarks at the International AI Summit in Dublin. He said AI could also replace some workers, reducing labour’s share of total income. The ECB has not yet seen a major shift in overall employment trends, though hiring plans are muted.

AI use at work is spreading. In an ECB household survey, 52% of workers reported using AI at work in 2026, up from 26% in 2024. The median worker who used AI reported saving three hours a week.

Those time savings do not necessarily translate into higher productivity. Gains depend on whether workers use the time to produce more and whether employers can put the added capacity to use. The ECB has not detected a material effect on aggregate productivity.

Lane said AI’s labour-market effects could differ by occupation. Demand may grow for jobs that complement the technology while falling for work that AI can replace. The ECB’s fourth-quarter 2025 firm survey found that 64% of companies used AI experimentally or moderately, while 7% reported significant use.

AI investment may also affect financial conditions. Lane said investment linked to AI may be contributing to higher global long-term interest rates, tightening conditions in the Eurozone as the huge investments made by AI businesses compete with governments for funding.

France cannot continue financing Ukraine because of the "perilous" state of the Eurozone's second-largest economy, far-right presidential candidate and opinion-poll leader Marine Le Pen said earlier this week.

"France today is in an extremely perilous situation," she added, referring to the country's high deficit and weak economic growth.

Ukraine’s President, Volodymyr Zelenskyy, commenting on Le Pen’s stated intention to halt funding for Ukraine if she comes to power, said Ukrainian military experience and technology could strengthen partners' security and benefit French industry.

"I think French industry can only win with these technologies, with this cooperation and co-production. And it's not to pay Ukraine for today. We are not in the first and the second year of the war. Yes, it is to help Ukraine be strong, and Ukraine will give back security for somebody's experience."

The ‘race’ to replace Christine Lagarde as President of the ECB continues at pace. The World Economic Forum could appoint Lagarde as its next chair as soon as next month, executives at the organisation told Reuters, meaning she would step down early as European Central Bank chief and trigger a wider reshuffle at the ECB's top.

Lagarde‘s ECB term is scheduled to end in October 2027. Leaving early would give European Union leaders a chance to pick a new ECB President before France’s spring presidential election. It could pave the way for a deal involving two other senior ECB roles.

The WEF‘s Board of Trustees, which includes Lagarde herself, was due to meet on November 2 and could elect her as its next chair, according to people close to the organisation, who spoke on condition of anonymity due to the sensitivity of the matter.

A spokesperson for the WEF said the forum would not confirm when the next full Board of Trustees meeting would take place, but that it aimed to hold one before the end of the year.

Reuters said the board could also set a date for a vote that would enable Lagarde to appear as the designated chair when the WEF‘s annual meeting takes place in January in Davos, where political and business leaders gather to discuss global economic and financial issues.

They cautioned that Lagarde‘s election was not certain, but said the 70-year-old former French finance minister had broad support from the board, which lists 27 members on its website.

The ECB declined to comment.

The Euro strengthened modestly in global FX markets yesterday, recovering from earlier U.S. CPI-driven weakness as U.S. Treasury yields fell, the dollar retreated, and euro shorts unwound. EUR/USD moved back towards the mid-1.12s, while EUR/GBP rebounded slightly from oversold levels.

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