Britain’s economy has absorbed the latest energy shock better than the Bank of England expected. The question now is whether that resilience can last.
Sarah Breeden, the central bank’s deputy governor, said she had been “surprised” by the economy’s ability to withstand the latest surge in energy costs triggered by the conflict in the Middle East, after official figures revealed unexpected growth in August.
Gross domestic product rose 0.1 per cent, after expanding 0.4 per cent in July, according to the Office for National Statistics.
The reading confounded economists who had forecast a 0.1 per cent contraction, offering Chancellor Rachel Reeves a modest economic reprieve ahead of the autumn Budget.
But beneath the better-than-expected figures lies a more uncomfortable question: has Britain weathered the shock, or has the damage simply been delayed?
“We’ve been surprised so far about how well the economy has absorbed what has been a pretty significant energy price shock,” Breeden told CNBC on Thursday.
She pointed to lessons learned from the 2022 energy crisis, when Russia’s invasion of Ukraine sent energy prices soaring and exposed businesses and households to a brutal rise in costs. Many companies had since hedged their energy purchases, cushioning the immediate impact of higher prices.
Artificial intelligence investment has also provided a source of support, with businesses considering new technology and data-centre development helping to sustain activity, even if Britain’s AI expansion remains smaller than that of the US.
Yet Breeden stopped short of declaring victory. The Bank is trying to establish whether companies’ ability to absorb higher costs has genuinely reduced the economic damage — or merely postponed it.
That distinction matters for monetary policy. If firms have temporarily shielded customers from higher costs, the pressure could re-emerge later, complicating the Bank’s efforts to bring inflation under control without choking off growth.
For households, the resilience visible in the national accounts has offered less comfort. Consumers are still struggling with higher prices after years of successive shocks, from the war in Ukraine to trade disruption and now renewed energy-market volatility.
“There is a sense of: ‘Oh, here we go again’,” Breeden said, describing conversations with people around the country. Consumers were trying to manage their costs, she added, while businesses were increasingly reluctant to pass higher expenses directly on to customers.
The latest growth figures suggest Britain’s economy is not “falling off a cliff”, with the labour market also holding up. But that does not mean the affordability crisis has disappeared.
Inflation stood at 3.1 per cent in August, a five-month high, driven upwards by fuel prices and air fares. The next monthly inflation figures, due next week, will provide a fresh test of whether the energy shock is feeding into the wider cost of living.
The Bank faces a delicate balancing act. Raising interest rates too aggressively risks weakening demand and punishing businesses already struggling with costs. Easing policy too soon could allow price pressures to become entrenched.
For Reeves, August’s unexpected growth is welcome evidence that the economy has not buckled under pressure. But one month’s figures cannot establish whether Britain has entered a more durable period of resilience.
The danger is that the economy’s apparent strength reflects businesses and households absorbing pain they cannot sustain indefinitely. The shock may have been softened. It has not necessarily been defeated.
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