^{Photo: RTE}

Growth Grinds to a Halt After Promising Start to the Year

The UK economy stalled in July, with official data from the Office for National Statistics (ONS) showing zero growth compared with June. This flat reading follows a 0.4% expansion the previous month, signaling a sharp loss of momentum after what had been a surprisingly resilient first half of the year.

In July, industrial production suffered a steep 0.9% drop, dragged down by weaker manufacturing and energy output. By contrast, services—the UK’s largest sector—edged up just 0.2%, while construction posted a mild 0.3% gain.

The stagnation comes after the economy grew by 0.3% in the second quarter, down from a strong 0.7% surge in the first quarter, when the UK briefly led G7 nations in growth.

Economists Warn of a Broader Slowdown Ahead

Many economists now expect this slowdown to deepen through the second half of 2025. Deutsche Bank’s chief UK economist Sanjay Raja said the earlier growth spurt was boosted by “one-off factors” such as stockpiling, trade-fronting, and higher public sector spending.

“As these temporary boosts unwind, the economy is likely to lose steam, with GDP growth set to cool noticeably,” Raja noted. Several analysts now forecast UK GDP growth of just 0.1–0.2% per quarter in the final months of 2025, well below the 0.5% average seen in late 2024.

A slowdown in global trade, tighter credit conditions, and softer consumer spending are also expected to weigh on growth in the months ahead. Retail sales volumes, for instance, slipped 1.2% in July, highlighting weakening household demand as higher borrowing costs bite.

Fiscal Pressure Mounts on Reeves

This economic wobble lands just as Chancellor Rachel Reeves prepares to unveil her 2026 fiscal roadmap in the Autumn Budget on November 26. A weaker growth backdrop could complicate her plans to reduce the UK’s budget deficit—which still stands near 5% of GDP—while also delivering on pledges to boost infrastructure spending and support public services.

“The room for fiscal giveaways is shrinking,” said Fabio Balboni, senior European economist at HSBC. “High deficits, slowing growth, and sticky inflation leave the government with difficult decisions.”

Bank of England Walks a Tightrope

Meanwhile, the Bank of England is facing a delicate balancing act. Inflation surprised to the upside in July, rising to 3.8%—still nearly double the central bank’s 2% target. At the same time, economic momentum is fading fast.

In August, the Bank of England cut interest rates by 25 basis points to 4% in a narrow 5–4 vote, marking its first rate cut in over a year. However, it is widely expected to hold rates steady at its upcoming September 18 meeting as policymakers wait for clearer data.

Markets are now focused on the central bank’s next meeting on November 6, just weeks before the budget. ING’s global head of macro Carsten Brzeski said, “We still expect another rate cut in November, though the surprisingly hawkish tone in August has made us less certain.”

What’s Next

With inflation still high, growth slowing, and fiscal headwinds mounting, the UK economy faces a tricky few months ahead. How Chancellor Reeves and the Bank of England navigate this delicate moment will shape the country’s economic trajectory well into 2026.

For now, July’s stagnation serves as a warning shot: after a strong start to the year, the UK’s recovery may be running out of steam.