The UK economy showed zero signs of growth in July, with monthly GDP flatlining. The result was broadly in line with analysts’ expectations, following growth of 0.4% the month before in June.
The lack of growth was largely driven by a manufacturing slump, which contributed to a 0.9% drop in production output. The other two sectors of the economy, services and construction, both grew in July by 0.1% and 0.2% respectively.
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Meanwhile, second-quarter growth was largely driven by government spending – arguably a less important growth engine than household spending and business investment.
He added: “As the US trade war catches up with the UK, global headwinds will gather pace, weakening the UK’s external backdrop. Domestically, we also see some drag in the economy from higher inflation, Budget uncertainty, and a still-sluggish labour market.”
Main drivers of GDP in July
Services (+0.1%) and construction (+0.2%) both contributed positively to monthly GDP in July, but were offset by a production slump (-0.9%). The services sector is the largest component of the UK economy, accounting for around 80% of total output.
Within the services sector, transportation and storage were the biggest drivers of growth, followed by health and social work activities, despite resident doctor strikes at the end of the month.
In the construction sector, new work was the main driver of growth, while repair and maintenance works were flat.
Offsetting this was lower output in the production sector, primarily driven by a manufacturing slump. Mining and quarrying activity also dropped.
On a three-month basis, services output (+0.4%) was the largest contributor to GDP growth, followed by construction output (+0.6%). Although the rate of growth in the construction sector was higher, it makes up a smaller portion of the overall economy.
Production output fell by 1.3% on a three-month basis.
Interest rate cut still “off the table”
Although growth flatlined in July, an interest rate cut still looks highly unlikely when the Bank of England meets on 18 September. Over the past month, experts have dialled down their expectation of one or two more interest rate cuts this year, and are now expecting borrowing costs to fall more slowly.
Figures cited by Reuters earlier this week showed traders were forecasting a 97% chance of no change during September’s rate-setting meeting.
Despite July’s “dispiriting” GDP figures, a September policy loosening remains “off the table” given inflation concerns, said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.
He added: “July’s slowdown is probably the start of a more restrained period for the economy with higher inflation and rising job losses likely to have stifled activity in August, despite an expected uplift from the warm weather.”
Inflation hit 3.8% in July and is expected to peak at 4% in September, partly driven by higher food prices.
Despite this, financial institution ING thinks we could see one more cut this year, coming in November. Deutsche Bank agrees but thinks it will fall in December, partly because of the timing of the Budget.
Research provider Pantheon Macroeconomics is more hawkish, and thinks no further cuts will materialise until 2026.
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