UK economy stalled again in July, but interest rate cut looks unlikely

The UK economy stalled again in July, according to the latest GDP figures from the Office for National Statistics. 

It marks the second month in a row where the economy has shown no growth at all – bad news for the Labour government as it seeks to make economic growth its “national mission”. Services output grew by 0.1% in July, but construction output fell by 0.4%, while production output dropped by 0.8%. 

The figures look slightly better on a three-month basis. Real GDP is estimated to have grown by 0.5% (May-July) compared to the previous period (February-April). Services output grew by 0.6%, while construction output grew by 1.2% – its first positive contribution on a three-month basis since September 2023. Meanwhile, production output decreased by 0.1%. 

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“While the 0.5% growth in the three months to July might provide some reassurance of underlying resilience, the failure to meet the 0.2% growth forecast for July points to fragility in the economy,” says Richard Flax, chief investment officer at the investment platform Moneyfarm. 

Some commentators have expressed surprise at the economy flatlining in July, after the Euros and the start of the Paris Olympics were expected to deliver a boost. While licensed premises noted a positive impact from the football, some restaurants said the tournament caused their footfall to drop. Meanwhile, travel agents reported an increase in bookings from the Paris Olympics, but the overall effect wasn’t enough to push UK GDP into positive territory in July. 

Attention now is on the Bank of England and whether weak economic growth will bolster the argument for another interest rate cut. The Bank has three remaining meetings this year. See our calendar of upcoming Bank of England meetings for the full list of dates.

What has caused the UK economy to flatline?

The UK economy has long had a problem with weak economic growth, partly driven by public spending cuts and low private investment. The situation has not been helped by Brexit in recent years, after the decision to leave the European Union prompted an exodus from UK equity funds and the London Stock Exchange. 

High interest rates have also caused problems more recently, though, particularly for sectors like housebuilding. While the UK quickly recovered from its brief and shallow recession at the end of 2023, economic growth remains limp overall as monetary policy continues to take its toll. 

The good news is that interest rates have now peaked, with the Bank of England making its first rate cut on 1 August. One or two further cuts are expected later this year. What’s more, there are steps policymakers can take to turn the growth outlook around, although it is a “difficult dance”, as Danni Hewson, head of financial analysis at AJ Bell, points out. 

Commenting on the latest growth figures and government developments, she says: “Resolving industrial disputes will help boost growth in sectors like health, which did show positive momentum in a month that only saw one day of strike action from junior doctors.

“Persuading players like Amazon to continue to invest in tech services is a sound strategy but with so many rumours swirling about next month’s Budget, getting more businesses to inject cash into the UK will require a deft hand.

“Transparency is vital, as is positivity, with the post-election honeymoon cut short by a government keen to keep expectations low. It’s a difficult dance and finding the correct tempo will take time.”

Will growth concerns prompt the Bank of England to cut interest rates?

Despite two months of zero growth, a September rate cut from the Bank of England looks unlikely. After cutting rates in August for the first time since 2020, the Monetary Policy Committee made it clear that it would be treading a cautious path ahead. 

Wages are now growing at the slowest rate in over two years, and services inflation is starting to come down, but rising energy prices are expected to drive the Consumer Prices Index (CPI) higher later this year. Inflation crept up to 2.2% in July after two months of hitting the Bank of England’s 2% target.

Markets are currently pricing in around a 70% likelihood that rates will be kept on hold on 19 September, while the latest poll from Reuters shows that 65% of economists expect just one more rate cut from the Bank of England in 2024, most likely coming in November. 

“Pay growth is still running at more than twice the rate of consumer price growth and there are still niggles of worry that those high wage bills might be passed on, as higher prices for goods and services,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown. “With the headline rate of inflation having crept away from target at the last snapshot, some policymakers may still be wary.”