(Bloomberg) -- The UK economy stagnated for a second month in July, suggesting that a rapid recovery from recession is now losing momentum in a blow for Prime Minister Keir Starmer.
Gross domestic product was unchanged after flatlining in June, the Office for National Statistics said Wednesday. Economists were forecasting a 0.2% increase. Declines in production and construction were offset by the powerhouse services industry.
The British economy outpaced all of its Group of Seven peers in the first half with an expansion of 1.3%. Its performance in the second half is expected to be significantly weaker, however, with the Bank of England and private-sector economists forecasting growth of 0.3% on average in the third and fourth quarters. The economy has posted no growth in three of the past four months.
Labour, which swept to victory in the July general election, is counting on growth to repair the public finances and deliver the boost to living standards promised to voters. Starmer has pledged the fastest sustained growth in the G-7 by reforming the planning system and lifting investment, a lofty commitment after more than a decade of feeble productivity gains.
However, economists are warning of potential headwinds as Chancellor of the Exchequer Rachel Reeves prepares to announce big tax rises in her budget on Oct. 30 to meet what she claimed was £22 billion ($28.8 billion) of unfunded and undisclosed spending commitments left by the previous government.
What Bloomberg Economics Says...
“The stagnation in GDP in July suggests the UK economy is likely to slow somewhat in the second half of the year, after a blistering first six months. Despite the weak print, we continue to think the main risk to our view is that momentum holds up for longer than we’re expecting.
—Ana Andrade and Dan Hanson. Click to read the REACT on the Terminal
The pound was little changed after the release, holding gains of 0.1% to trade at $1.3094. It has advanced 2.8% against the dollar this year, outperforming all Group-of-10 peers, as the BOE is widely seen trailing peers in lowering interest rates. Money markets added to bets on rate cuts, pricing in between six and seven reductions by the end of 2025.
Labour is expected to get some help from the BOE, which is expected to cut rates again in November with a strong possibility of a further reduction in December. The economy is also being underpinned by strong employment growth and rising real incomes as wages continue to outpace an inflation rate that was in double digits just 18 months ago.
Signs of a cooler economy will be welcomed at the BOE, which signaled that stronger-than-expected growth could hold up its interest rate cuts. Governor Andrew Bailey said the robust recovery in the first half of the year threatened to keep inflationary pressures high after the Monetary Policy Committee reduced rates for the first time in over four years in August.
While traders do not expect the BOE to loosen policy again at its meeting next week, they are betting on a move toward a quicker cutting cycle later in the year. A shift toward expecting more loosening has been caused by growing concerns about the resilience of economic activity, particularly in the US.
“The figures suggest the UK’s recovery remains on track, though growth over the second half of the year will probably be a bit slower than in recent quarters,” said CBI Lead Economist Ben Jones. “Ahead of what promises to be a difficult budget next month, the government is treading a narrow path to put the public finances on a sustainable footing while maintaining the confidence of business and investors in the recovery.”
The services sector saw 0.1% growth in July, driven by computer programming and consultancy and a rebound in retail sales. These gains were partially offset by falls for advertising companies, architects and engineers. Strikes by junior doctors had a smaller impact on the economy than in June, when 98,000 working days were lost to industrial action. That figure fell to just 42,000 in July, official figures Tuesday showed.
There were declines in both production, including a 1% month-on-month contraction in manufacturing where auto makers cut production by 3.5%, and in the construction industry.
The ONS said that sporting events boosted some industries, including the retail and arts, entertainment and recreation sectors. The UEFA European Football Championship helped pubs and bars. Restaurants, however, said this weighed on footfall. The Olympics in Paris also helped to lift bookings at travel agents, though their output still fell on the month.
“The pace of the slowdown is a little faster than we anticipated – especially in light of the still stellar survey data we’ve seen over summer,” said Sanjay Raja, chief UK economist at Deutsche Bank. “We now see downside risks building given the weaker-than-expected GDP print.”
--With assistance from Mark Evans, Joel Rinneby, James Hirai and Constantine Courcoulas.
(Adds money markets, Bloomberg Economics reaction)
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