British economy stagnates in July in growth challenge for new govt

The UK economy stalled again in July, official data showed Wednesday, dealing a blow to the new Labour government of Prime Minister Keir Starmer that has put growth expansion at the top of its priority list.

The economy stagnated for a second month as manufacturing output dropped sharply, and construction was also mired in a downturn.

Economic output showed no change in month-on-month terms in July, as it did in June, data from the Office for National Statistics (ONS) showed on Wednesday.

Analysts had predicted a slight uplift in growth for July, while previous data showed the U.K. economy grew at a slightly slower pace in the second quarter compared with the first.

A Reuters poll of economists had pointed to a 0.2% month-on-month expansion of gross domestic product (GDP). A consensus provided by Pantheon Macroeconomics anticipated a modest 0.1% expansion.

The figures are unlikely to sway expectations that the Bank of England (BoE) will cut interest rates once more this year, probably in November rather than on Sept. 19.

Sterling edged lower against the dollar and investors assigned a roughly 25% chance of a rate cut at next week's meeting, slightly higher than on Tuesday.

Modest growth in the services sector, which expanded by 0.1% in July, was offset by declines in manufacturing and construction.

ONS Director of Economic Statistics Liz McKeown said: "The economy recorded no growth for the second month running, though longer term strength in the services sector meant there was growth over the last three months as a whole.

"July's monthly services growth was led by computer programmers and health, which recovered from strike action in June. These gains were partially offset by falls for advertising companies, architects and engineers.

"Manufacturing fell, overall, with a particularly poor month for car and machinery firms, while construction also declined."

Hailey Low, associate economist at the National Institute of Economic and Social Research think tank, said the economy was likely to grow through the second half of 2024, albeit at a slower pace than early in the year when it rebounded from a shallow recession.

"All eyes will undoubtedly be on the upcoming (budget), especially for any policies critical to delivering sustained long-term economic growth – an agenda promised by the Labour government," Low said.

In response to Wednesday's data, Finance Minister Rachel Reeves said she was under no illusion about the scale of the challenge Britain faced and said "change would not happen overnight."

"Two-quarters of positive economic growth does not make up for fourteen years of stagnation."

"That is why we are taking the long-term decisions now to fix the foundations of our economy," she added in a statement.

She pointed to the announcement on Wednesday that Amazon Web Services (AWS) plans to spend 8 billion pounds ($10.45 billion) in the United Kingdom over the next five years to build data centers as a reason for optimism.

Britain's economy has grown slowly since the COVID-19 pandemic, expanding just 2.3% between the fourth quarter of 2019 and the second quarter of 2024.

Economic output in July was 1.2% higher than its level in July 2023, the ONS said – lower than the 1.4% growth predicted by economists.

Starmer said he wanted the economy to achieve annual growth of 2.5% when campaigning in the run-up to July 4's election – a rate that Britain has not regularly reached since before the 2008 financial crisis.

Separate trade data for July showed a sharp fall in goods exports to both European Union and non-EU countries. Services exports grew only marginally.

After adjusting for inflation, goods exports to non-EU countries fell to their lowest level since May 2020. Outside of the COVID-19 pandemic, it was the lowest reading since September 2011.