UK growth stalls in July as slowdown clouds outlook for Reeves’ budget

The United Kingdom economy stalled in July, heightening fears of a broader slowdown and compounding the challenges facing Chancellor Rachel Reeves as she prepares her first Autumn Budget.

Figures published Friday by the Office for National Statistics showed gross domestic product was flat on the month, matching forecasts and following 0.4% growth in June. Output from production industries slumped 0.9%, offsetting small gains in services and construction.

The data comes after Britain notched a surprise 0.3% expansion in the second quarter, the fastest in the G7, but economists say that momentum has already begun to fade.

“After a stronger-than-expected second quarter, all signs now point to weaker growth in the second half of the year,” said Sanjay Raja, Deutsche Bank’s chief UK economist. “Temporary boosts from stockpiling, trade and public spending are now reversing.”

Reeves has vowed to rein in debt and ensure spending is funded by tax receipts rather than borrowing. But the July stagnation threatens to complicate her fiscal strategy ahead of the Nov. 26 budget, where difficult choices on spending cuts or tax rises loom.

“The lack of growth in July highlights how fragile momentum remains, and suggests Reeves may have little choice but to raise taxes in order to meet her fiscal targets,” said Paul Dales, chief UK economist at Capital Economics.

The Bank of England, which lowered interest rates to 4% in August, is grappling with the twin challenge of sluggish growth and stubborn inflation, which picked up to 3.8% in July.

“The weak GDP figure won’t offset the Bank’s inflation concerns,” Dales added. Fabio Balboni, senior European economist at HSBC, noted that “inflation resilience makes it harder for central banks to cut further, even as fiscal deficits remain high.”

Policymakers are expected to keep rates steady at their Sept. 18 meeting, but the Nov. 6 decision, just weeks before the budget, is seen as pivotal.

“We still see a rate cut in November, but the August vote shows the committee is wary of moving too quickly,” said Carsten Brzeski, global head of macro at ING, according to CNBC.