UK economy returned to growth ahead of annual budget

By Suban Abdulla and Andy Bruce

LONDON (Reuters) -Britain's economy grew in August after two consecutive months of no growth, something that will reassure finance minister Rachel Reeves ahead of the new Labour government's first budget.

Economic output rose by 0.2% in monthly terms in August, according to figures from the Office for National Statistics that were in line with expectations in a Reuters poll of economists.

"This will provide a timely boost for the chancellor amidst a backdrop of growing spending pressures," said Yael Selfin, chief economist at KPMG UK.

Reeves welcomed the news on Friday and said that growing the economy was a top priority for the government.

Britain's economy now looks on track for a third consecutive quarter of economic growth. The ONS said data for September GDP would need to show a month-on-month fall of 0.3% to 0.6% to generate a flat quarterly reading, assuming no revisions to existing figures.

Sterling was little changed against the U.S. dollar after Friday's ONS figures were released. Investors added to their bets of a quarter-point rate cut by the Bank of England in November.

The ONS left unrevised its estimates for monthly gross domestic output for July and June, when the economy stagnated.

But it revised down its estimates for growth in April and May, which now show readings of -0.1% and +0.2%, compared with previous estimates of 0.0% and +0.4%.

The Bank of England expects economic growth to slow slightly to 0.4% in the third quarter and 0.2% in the final three months of the year - which it views as closer to the economy's underlying growth rate.

Compared to a year ago, economic output was 1.0% higher, below the 1.4% growth forecast by economists, a miss that reflected downward revisions to past months.

Prime Minister Keir Starmer will host an international investment summit on Oct. 14, aimed at boosting foreign direct investment to help improve economic growth - one of his main missions since coming to power in July.

(Reporting by Suban Abdulla and Andy Bruce; editing by William James and Toby Chopra)