Economy stagnates as GDP flatlines for second month in a row

The UK economy stagnated in July, recording the second consecutive month of zero growth as momentum slowed after a strong start to the year.
Official figures showed the economy flatlined month-on-month, with growth below the 0.2 per cent rise in gross domestic product (GDP) predicted by economists. Economic output grew by 0.5 per cent when measured on a rolling three-month basis, dipping from 0.6 per cent in the previous period.
The stagnant performance is likely to pull down quarterly growth in the three months to September, after GDP rose by 0.7 per cent in the first quarter and 0.6 per cent between April and June, according to the Office for National Statistics, among the highest rates in the G7.
The ONS said July’s weak performance reflected a decline in monthly manufacturing activity of 1 per cent, a decline in production output of 0.8 per cent, and a 0.4 per cent contraction in the construction sector. The services sector, which makes up three quarters of the economy, expanded by a modest 0.1 per cent after falling by 0.1 per cent in June.
July’s figures coincided with the general election on July 4 and the start of the Euros football tournament, with the latter helping boost retail sales and consumer spending.
Rachel Reeves, who is preparing to deliver her first budget at the end of October, said the figures highlighted the government’s challenge in overturning “14 years of stagnation”.
“I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight,” the chancellor said. “Two quarters of positive economic growth does not make up for 14 years of stagnation.”
The weaker-than-expected economic growth could force the Bank of England into cutting interest rates more aggressively than expected this year, with wages steadily falling and measures of the labour market cooling off this year. The Bank cut interest rates for the first time in four years in August but is expected to keep the base rate unchanged at 5 per cent next week.
The Bank expects quarterly growth of 0.4 per cent in the three months to September, a figure that may undershoot after July’s flat performance. Fresh inflation figures for August will be published ahead of the Monetary Policy Committee’s decision next Thursday. Economists expect an uptick in annual price rises from 2.2 per cent to 2.3 per cent.
Sanjay Raja, chief UK economist at Deutsche Bank, said the UK’s growth rate was “normalising from the rapid pace set in the first half of 2024 – this much should be expected”. He warned that the forecast 0.4 per cent GDP rise in the third quarter was now at risk.
The pound gained 0.18 per cent against the dollar in morning trading, UK stocks traded flat, and yields on 10-year gilts rallied by 1.5 basis to 3.6 per cent. Yields fall when a bond’s price rises.
Sonali Punhani, chief UK economist at Bank of America, said the GDP numbers would not force the Bank into a rate cut next week as the MPC kept its focus on managing inflation. “While growth has disappointed today, the monthly numbers tend to be volatile and come after above trend growth in the first half of the year and a tight labour market.”