By Lai Zhen Tao, a trainee reporter at 21st Century Economic Report, reporting from Guangzhou

After two consecutive months of stagnant growth, the UK economy has regained a slight growth momentum.

On Friday local time, the UK's Office for National Statistics released the latest economic data, showing that the UK's gross domestic product (GDP) increased by 0.2% month-on-month in August, in line with economists' expectations. All major industries achieved growth, with manufacturing and construction rebounding more quickly.

In July and June, the UK's total output value had been flat for two consecutive months, and the GDP growth rate for April, after adjustment, also changed from 0% to -0.1%.

After the release of the August data, the market generally showed a muted performance. At the close on Friday local time, the pound rose slightly by 0.1% against the US dollar, still at a low level in the past month, and the FTSE 100 index closed at 8,253.65, up slightly by 0.19%.

The economy's return to growth is a positive signal for the Starmer government, which has been in office for less than four months. However, market confidence is still at a low point, and the budget being formulated by the UK Treasury also makes the market very uneasy. After taking office, Starmer has repeatedly reminded the public that the government plans to announce a "painful" budget on October 30th, and it is highly likely that cutting expenditures and taxation will be policy options. But for both the British public and investors, this is hard to accept.

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On one side is the ever-expanding government deficit, and on the other is the UK economy that urgently needs to be stimulated. Can the Starmer government walk the "tightrope" well?

Ephemeral strong recoveryAt the beginning of the year, the UK's economic growth rate was quite impressive among developed countries. Data from the Office for National Statistics (ONS) showed that the UK's GDP grew by 1.3% year-on-year in the first half of the year, leading the G7 countries.

However, as James Smith, an economist at ING Group for developed markets, said in a report, if the published economic data is credible, the UK economy performed well in the first few months of the year, but later data showed that the UK's strong recovery was only a flash in the pan.

In June and July of this year, the UK economy stagnated for two consecutive months. Liz Mckeown, Director of Economic Statistics at the ONS, said that the growth in the first three months of this year was mainly driven by the service industry, but the economic growth was flat from June, and the drag was due to the contraction of the service industry, with weak performance in healthcare, retail and wholesale businesses.

Why was the UK's strong rebound so short-lived, and the growth momentum slowed down significantly after a few months?

Dong Yifan, a researcher at the European Institute of the China Institute of Contemporary International Relations, analyzed to the 21st Century Economic Report that after a period of growth, the slowdown or stagnation of the UK's economic development is related to seasonal and cyclical factors on the one hand. Many Southern European countries will see significant growth driven by the tourism industry in the summer, but the UK does not have relevant advantages. On the other hand, June and July are the period of the UK's general election and government change, and the industry and investors have certain concerns about the direction of British politics, which will also be reflected in the macro economy.

Regarding the economy getting out of stagnation and the growth rate rebounding in August, Dong Yifan said that this is related to the new government led by Starmer taking office and releasing new economic stimulus plans, and it also reflects that the UK economy is returning to moderate growth.

However, the latest data also reflects that it is highly likely that the UK will not return to a strong growth track. In September, the GfK consumer confidence index fell from -13 in August to -20, the highest level in nearly three years. The comprehensive PMI fell from 53.8 in August to 52.6, which is above the boom and bust line but lower than the expectations of economists.

"The overall feeling is that the economy is relatively weak, basically relying on past accumulation for development, and there is no vitality in the venture capital industry I am engaged in. Ordinary people will also feel that prices are high," a Chinese person working in the UK said to the 21st Century Economic Report.

Wang Zhanpeng, director of the British Research Center at Beijing Foreign Studies University, said to the 21st Century Economic Report that after the epidemic, the UK economy is still in a relatively fragile state, not to the point of recession, has a certain resilience, and is likely to continue the trend of low-speed growth in the future, with year-on-year growth fluctuating around 1% in the short term.

However, the bleak growth has supported the expectation of the Bank of England's interest rate cut in November. Previously, the Bank of England cut interest rates for the first time in more than four years in August and suspended the cut in September. Recently, the market's bet on the Bank of England cutting interest rates by 25 basis points at the interest rate meeting on November 7 has soared to 98%, and many investors also believe that the Bank of England will continue to cut interest rates in December.Attracting Investment: UK Struggles to Offer "Reassurance Pills"

During his campaign and after taking office, Starmer repeatedly promised to boost the economy, repair finances, and public services by reforming the planning system and increasing investment.

To attract investment, the Starmer government has taken many actions. Not long ago, he appointed Poppy Gustafsson, the co-founder of AI company Darktrace, as the new Minister of Investment. On October 14th, Starmer will host an International Investment Summit in London, inviting nearly 200 executives and business elites from multinational companies such as Alphabet, Google, GlaxoSmithKline, BlackRock, and Brookfield, to promote the UK to them. After Chancellor Reeves went to the United States in August to attract investment, he is also considering visiting China in the near future to restart Sino-British trade and investment talks.

But for investors, how attractive is the UK?

Taking the recent investment summit as an example, many business leaders are hesitating whether to fly to the UK to attend the meeting, a major reason being the "looming" tax increase policy. At the end of October, the UK government will release the budget, which may raise capital gains tax. A technology industry executive said that people are very worried that they will applaud happily for policy advocacy during the meeting, but may have to worry about the tax increase measures two weeks later.

PwC's Chief Economist, Barrett Kupelian, said that the biggest question is the government's vision and measures for the economy. Businesses, households, and foreign investors need certainty to make choices and decide on investments.

Wang Zhanpeng believes that the UK still faces the problem of industrial hollowing out, with its manufacturing industry proportion being relatively low among developed countries. It wants to attract investment but lacks a complete industrial support, and labor productivity is also relatively low. There are short-term unstable factors, such as adjustments in relations with Europe and tax policy reforms, which to some extent constitute unfavorable factors for attracting investment.Markets Anxiously Await Budget Release

On July 30th, shortly after the new British cabinet took office, Chancellor of the Exchequer Reeves announced in a speech that the previous government left a fiscal deficit of £22 billion. This year, the Treasury will take measures to reduce expenditures by £5.5 billion, and more than £8 billion next year to fill the gap.

Today, the Resolution Foundation, a British think tank, also stated that the UK Labour government may need to increase taxes by approximately £20 billion in the fiscal budget to avoid cutting public service expenditures.

The UK seems to be facing an unprecedented government debt issue. According to the UK's Office for National Statistics on September 20th, the preliminary estimate of the UK's public sector net debt as of the end of August has reached 100% of GDP. This is the first time since the 1960s that the UK's national debt has been equal to economic output.

Wang Zhanpeng told reporters that the EU sets a standard for member states that public debt should not exceed 60% of the economic total, and the government deficit should not exceed 3%. Even though the UK has already left the EU, the current government debt as a percentage of GDP has reached 100%, which is significantly higher than the EU's red line. In recent years, the UK has been accumulating government debt, especially during the pandemic when large-scale stimulus policies were implemented, significantly increasing fiscal expenditures. In addition, Starmer, within the left-wing Labour Party, is trying to take a middle path, but compared to the Conservative government, there is still a tendency to turn left, such as formulating industrial policies to stimulate the economy and improve welfare, which will potentially increase expenditures. Therefore, the pressure on the current UK government's debt issue is still relatively large.

Under this background, the first fiscal budget of Starmer's new government has to maintain a balance among various demands. On the one hand, government finances are already stretched thin, and on the other hand, infrastructure and public service issues such as healthcare, housing, and transportation are prominent, causing a lot of public dissatisfaction. The continuous weak economic growth also urgently needs policy relief.

The UK government has repeatedly stated that it will not raise taxes for ordinary people, but tax increases for high-income groups have been included in policy options. This week, it was reported that Reeves is considering increasing the capital gains tax rate and asking the budget office to assess how much additional revenue can be generated if a 33% to 39% tax is imposed on the second home.

However, some studies have shown that capital gains tax will mainly affect the high-income group of 350,000 people, which is still a very small range. Therefore, even if the capital gains tax is increased, it will not be of much help in alleviating fiscal pressure.

Dong Yifan pointed out that the potential tax increase measures of the Labour government are causing concerns among high-net-worth individuals. In attracting international investment, the government also shows a gap between policy advocacy and reality.Lindsay James, an investment strategist at Quilter Investors, stated that Reeves faces a "tricky balance" to ensure that her decisions do not suppress further economic growth. With the Bank of England's interest rate cut, the responsibility for developing the economy has shifted from Bank of England Governor Bailey to Reeves, who must make key fiscal decisions. Both she and the Prime Minister believe that "pain" is a necessary condition for future prosperity, but overcorrection could indeed come at the expense of the economy.