Economy stalls as GDP stagnates for second month in a row

The economy stagnated in July, recording a second consecutive month of zero growth.
Official figures showed that the economy, after enjoying a strong start to the year, had stalled month-on-month, with growth below the 0.2 per cent rise in gross domestic product that had been predicted by economists. Economic output grew by 0.5 per cent when measured on a rolling three-month basis, dipping from 0.6 per cent in the previous period.
The disappointing performance is likely to pull down quarterly growth in the three months to the end of September, after GDP rose by 0.7 per cent in the first quarter and by 0.6 per cent between April and June, according to the Office for National Statistics. That was among the highest rates in the G7.
The ONS said July’s weak performance reflected a decline in monthly manufacturing activity of 1 per cent, a reduction in production output of 0.8 per cent and a 0.4 per cent contraction in the construction sector. The services sector, which makes up three quarters of the economy, expanded by a modest 0.1 per cent, after falling by 0.1 per cent in June.
July’s figures coincided with the general election on July 4 and the start of the Euro 2024 football tournament, with the latter helping to boost retail sales and consumer spending.
Rachel Reeves, who is preparing to deliver her first budget at the end of October, said the figures highlighted the government’s challenge in overturning “14 years of stagnation”.
“I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight,” the chancellor said. “Two quarters of positive economic growth does not make up for 14 years of stagnation.”
The figures could force the Bank of England into cutting interest rates more aggressively than previously expected, with wages falling steadily and measures of the labour market cooling. The Bank cut interest rates for the first time in four years in August but is expected to keep its base rate unchanged at 5 per cent next week.
The Bank expects quarterly growth of 0.4 per cent in the three months to the end of September, a figure that may undershoot after July’s flat performance. Fresh inflation figures for August will be published before the Bank’s ratesetting monetary policy committee’s decision next Thursday. Economists expect an increase in annual price rises from 2.2 per cent to 2.3 per cent.
Sanjay Raja, chief UK economist at Deutsche Bank, said Britain’s growth rate was “normalising from the rapid pace set in the first half of 2024. This much should be expected”. However, he warned that the forecast 0.4 per cent GDP rise in the third quarter was now at risk.
The pound rose by nearly 0.2 per cent against the dollar, UK stocks were largely flat and yields on ten-year gilts rallied by 1.5 basis to 3.6 per cent. Yields fall when a bond’s price rises.
Sonali Punhani, chief UK economist at Bank of America, said the GDP numbers would not force the Bank into a rate cut next week as the committee kept its focus on managing inflation. “While growth has disappointed today, the monthly numbers tend to be volatile and come after above-trend growth in the first half of the year and a tight labour market.”
In the topsy turvy world of the UK’s economic statistics, “bad” news about the state of the economy is quietly being cheered in the corridors of Whitehall (Mehreen Khan writes).
Before next month’s budget, Sir Keir Starmer’s new government has been hamming up its dire economic inheritance and piling on the gloom in an effort to explain the “tough decisions” on tax rises that are likely to be announced on October 30.
Part of the grim messaging has been undermined by the economy’s impressive growth performance in the first half of 2024, which put Britain second only to the United States as the fastest-growing in the G7. But two months of 0 per cent growth in June and July, as confirmed by the Office for National Statistics, may go some way in helping the government to make its point.
“Two quarters of positive economic growth does not make up for 14 years of stagnation,” the chancellor said.
July’s lack of growth was not expected, with most economists having forecast a modest rise of 0.2 per cent to 0.3 per cent at the start of the third quarter, driven by a recovery in the services sector. A series of high-frequency measures of the economy also had suggested that a rise in spending, fewer NHS strike days and improving household sentiment would result in higher monthly growth.
According to Julian Jessop, a fellow at the Institute of Economic Affairs, the think tank, the “government’s gloomy rhetoric about the state of the economy and the need for tough decisions have not helped”.
He added: “The poor July numbers are also hard to square with the mostly positive tone of the business and consumer surveys. There may have been some temporary factors at play, including election uncertainty and the weird weather.”
The growth undershoot is unlikely to prompt the Bank of England into another interest rate cut next week, but further prolonged weakness may lead to more than the one additional monetary-loosening exercise expected by traders before the end of the year.
For Rachel Reeves, the economy’s strong recovery from a brief recession is double-edged. Growth momentum is almost certain to slow in the second half of the year and could do so again in 2025.
The Office for Budget Responsibility, which will audit Reeves’s budget, is likely to upgrade its forecast for this year, made in March, and to reduce its growth projection for next year from 1.8 per cent to closer to 1.5 per cent.