UK economy stalls in July, as slowdown sets in

U.K. economic growth flatlined in July, according to data published Friday, adding to Chancellor Rachel Reeves' headache ahead of the Autumn Budget.

The figure was in line with expectations of economists polled by Reuters, and follows a 0.4% expansion in June.

In July, weakness was concentrated in production output, which contracted by 0.9%, while services and construction output both inched higher, the U.K.'s Office for National Statistics noted.

It comes after the economy grew by a better-than-expected 0.3% in the second quarter, although this was down from bumper growth of 0.7% seen in the first quarter.

Economists now expect a slowdown to take hold of the U.K. in the latter half of 2025.

"After a surprisingly stronger second quarter, where the U.K. claimed the fastest growth rate among G7 economies, all signs point to a slowdown in economic activity in the second half of the year," Sanjay Raja, Deutsche Bank's chief U.K. economist, noted this week.

"A course correction in trade-fronting, stockpiling, net acquisitions of precious metals, and public sector spending, we think, will see U.K. GDP growth slow into the second half of 2025," he added in emailed comments.

Finance Minister Reeves has made reviving the U.K. economy a top priority, but so far has struggled to turn her pledges into reality.

An economic slowdown is a blow to the government ahead of the Autumn Budget on Nov. 26, a high-stakes event for Reeves who has promised to ensure spending is funded by tax receipts, rather than borrowing, and to lower U.K. debt over the next few years.

As such, any potential tax hikes are a particular focus, Paul Dales, chief U.K. economist at Capital Economics, suggested in a note Friday.

"The stagnation in real GDP in July ... shows that the economy is still struggling to gain decent momentum in the face of the drag from previous hikes in taxes and possible further tax rises to come in the Budget," he said.

The Bank of England, meanwhile, is attempting to weigh this fiscal uncertainty with sticky inflation (which rose to a hotter-than-expected 3.8% in July).

"The soft performance of the economy in July probably isn't enough to offset the Bank of England's growing inflation fears," Dales noted.

Fabio Balboni, senior European economist at HSBC, struck a similar tone, telling CNBC last week that "inflation resilience obviously makes it harder for central banks to cut further."

"Then, on the other hand, you have fiscal concerns, still very large fiscal deficits, starting in the U.K., for instance, with very difficult decision looming ahead for the government at the Autumn Budget," Balboni added.

The Bank of England is due to meet in the meantime on Sept. 18, but is expected to hold rates steady after cutting them in August. Then, the bank's nine-member monetary policy committee voted by a majority of 5–4 to reduce the key interest rate, the "Bank Rate," by 25 basis points to 4%, saying it was taking a "gradual and careful" approach to monetary easing.

The central bank's Nov. 6 meeting is now in the spotlight, particularly as it comes just ahead of the budget.

"We still expect a rate cut in November, though the hawkish August decision weakened our conviction," Carsten Brzeski, global head of Macro at ING, said Thursday.