Road closure signs leaning against the outside wall of the Royal Exchange in the heart of London, on June 13, 2022, in London, England.
Richard Baker | Photos | Getty Images
According to data released Friday, UK economic growth was flatlined in July, adding to Prime Minister Rachel Reeves’ headache ahead of the fall budget.
The figures are consistent with expectations of economists voted by Reuters, following a 0.4% expansion in June.
In July, weaknesses were concentrated in production, shrinking by 0.9%, but both service and construction production were high, noting that the UK’s Bureau of National Statistics.
This comes after the economy grew after an increase of 0.3% more than expected, as it fell from bumper growth in the first quarter.
Economists hope that slowdowns will settle the UK in the second half of 2025.
“After the surprisingly strong second quarter when the UK claimed the fastest growth rate in the G7 economy, all signs indicate a slower economic activity later this year,” said Sanjay Raja, UK chief economist at Deutsche Bank.
“We expect UK GDP growth to slow in the second half of 2025 due to course revisions in trade, stockpile, precious metal net acquisitions and public sector spending,” he added in an emailed comment.
Rachel Reeves’ headache
Finance Minister Reeves has made the UK economy a top priority, but so far he has struggled to turn her pledge into reality.
The slowdown in the economy will hit the government ahead of the fall budget on November 26th. This is a high stakes event from Reeves that guarantees that spending will be covered by tax receipts rather than borrowing, and that it will reduce UK debt in the coming years.
So potential tax increases are a particular focus, Paul Dales, UK Economics President of Capital Economics, proposed in a memo on Friday.
“The actual GDP stagnation in July shows that the economy is struggling to gain decent momentum in the face of dragging from previous hikes of taxes and the potential for further tax rise within the budget,” he said.
Meanwhile, the Bank of England is trying to weigh this financial uncertainty with sticky inflation (which rose to 3.8% at higher temperatures than expected in July).
“The soft performance of the economy in July will probably not be enough to offset the Bank of England’s growing fear of inflation,” Dales noted.
Fabio Barboni, a senior European economist at HSBC, told CNBC last week that “inflation resilience will clearly be difficult to reduce further.”
“On the other hand, you have financial concerns, and you have a very large budget deficit that begins in the UK, for example. For example, the fall budget has a very difficult decision coming beyond the government,” added Barboni.
The Bank of England is scheduled to meet on September 18th, but will maintain a stable fee after cutting in August. The bank’s nine-person monetary policy committee then voted with a majority of five to four to reduce its main interest rate, “bank fees,” to 25 basis points, to 4%.
The Central Bank’s November 6th meeting is currently in the spotlight, especially as it is just ahead of the budget.
“Hawkish’s August decision weakened our conviction, but we still hope for a rate cut in November,” said Karsten Bruzeski, global head of ING’s macros.
