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 (GDP) was unchanged after flatlining in June, the Office for National Statistics (ONS) said on 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 (BOE) 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 Group of Seven 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 (US$28.8 billion or RM124.55 billion) of unfunded and undisclosed spending commitments left by the previous government. 

The pound was little changed after the release, holding gains of 0.1% to trade at US$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 signalled 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 in its meeting next week, they are betting on a move towards a quicker cutting cycle later in the year. A shift towards 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 on Tuesday showed.  

There were declines in both production, including a 1% month-on-month contraction in manufacturing where automakers 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 have seen over summer,” said Sanjay Raja, the chief UK economist of Deutsche Bank. “We now see downside risks building given the weaker-than-expected GDP print.”

  - Bloomberg