Labour plans to ramp up government borrowing are already “spooking investors”, Chancellor Rachel Reeves has been warned.

Economist Julian Jessop fears if the Chancellor delivers a high-taxes budget later this month, she risks derailing Britain’s fragile recovery in the process.

The UK economy experienced marginal growth in August after two months of stagnation, according to the latest official figures, with GDP up by 0.2 percent after flat performance in both June and July.

While this was in line with economists’ forecasts, the growth offers some relief to Ms Reeves after a period of economic stagnation. But Mr Jessop, Economics Fellow at the Institute of Economic Affairs, is unconvinced.

He explained: “The return to growth in August adds to evidence that the UK economy still has plenty of positive momentum.

“But the Government’s gloomy messaging and uncertainties over the direction of policy in many areas continue to cast a long shadow.

“The pace of growth has slowed from the unsustainable rates in the first half of the year, but the latest surveys also suggest that the recovery is now more broadly based.”

The UK economy has continued to perform “relatively well” compared both to expectations and to its peers, especially in the euro area, Mr Jessop pointed out.

However, he continued: “Nonetheless, worries about the tax burden and the Government’s other plans on everything from energy policy to employment rights are dampening business and consumer confidence and delaying investment and recruitment.

“The prospect of another surge in government borrowing is now starting to spook investors in the bond market too.

“The Chancellor will therefore still have to tread very carefully to ensure that the Budget does not derail the recovery.”

Ms Reeves today welcomed the figures, describing them as “good news”, and reaffirmed that economic growth remains the Government’s “top priority” in order to address challenges like fixing the NHS, rebuilding Britain, and improving the financial well-being of working people.

She added: “While change won’t happen overnight, we are acting swiftly to deliver on our promise of change.”

However, Ms Reeves has already warned that the upcoming Budget will involve “tough decisions”, raising concerns among business and consumer groups about potential measures.

The economic data comes ahead of a Government-hosted business summit in London next week, aimed at attracting more foreign investment into the UK.

ONS Director of Economic Statistics, Liz McKeown, noted: “All major sectors of the economy saw growth in August, although the overall trend is of slower growth in recent months compared to the first half of the year.”

She highlighted that sectors such as accountancy, retail, and manufacturing performed well, while construction rebounded after a dip in July. However, these gains were partly offset by declines in wholesale trade and oil extraction.

The services sector remained the main driver of growth, rising by 0.1 percent in August, mirroring the increase seen in July. Meanwhile, the smaller production sector recovered, posting 0.5 percent growth after a revised 0.7 percent contraction in July.

Construction output rose by 0.4 percent in August, following a 0.4 percent decline in the previous month, and grew by one percent over the three months to August 2024.

The Bank of England’s next meeting on interest rates is scheduled for November, with many economists predicting a quarter-point rate cut. However, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, cautioned that the positive GDP figures may delay such a move.

He said: “While a rate cut is still likely in November, these positive figures make it less certain by giving more hawkish policymakers reason to hold off on easing policy.”

Luke Bartholomew, deputy chief economist at asset manager Abrdn, added: “Following a strong first half of the year, a slowdown in the economy was expected in the second half. However, the upcoming Budget speculation could potentially exacerbate this deceleration.

“That said, these figures show a reassuring uptick in output, as easing inflation and improved weather conditions have revived activity in key sectors, including retail and manufacturing.”