UK economy stalls in July, as slowdown sets in

The UK economy recorded zero growth in July, following a 0.4% expansion in June and a 0.3% rise in Q2, signaling a broader deceleration after earlier stronger performance. This stagnation, driven by a 0.9% contraction in production output, intensifies the Bank of England's policy dilemma as it balances persistent inflation, which was 3.8% in July, against a slowing economy. With economists forecasting a more pronounced slowdown into 2025, the BoE, having recently cut rates to 4%, faces heightened scrutiny ahead of its November meeting and the upcoming Autumn Budget, navigating both monetary and fiscal pressures.

Analysis

The U.K. economy has reached a significant inflection point, with GDP growth stalling at 0.0% in July, confirming a slowdown after a 0.4% expansion in June and a surprisingly strong 0.3% growth in Q2. This stagnation was driven by a material 0.9% contraction in production output, which offset minor gains in the services and construction sectors. The data aligns with forecasts from economists, such as those at Deutsche Bank, who anticipate a broader economic deceleration in the second half of 2025 as the effects of earlier growth drivers like stockpiling and public spending fade. This creates a complex policy dilemma for the Bank of England, which must now navigate between slowing economic activity and persistently high inflation, recorded at a hotter-than-expected 3.8% in July. The central bank's recent 25 basis point rate cut to 4.0%, decided by a narrow 5-4 vote, highlights its cautious and divided stance. While the September BoE meeting is expected to result in a rate hold, significant attention has shifted to the November 6th meeting, which occurs just before the critical Autumn Budget and will be pivotal in signaling the future path of monetary policy amid rising fiscal concerns.

Key Decisions for Investors

• Investors should closely monitor incoming UK inflation data and Bank of England communications, as the divergence between stalling growth and sticky inflation creates significant uncertainty around the timing and magnitude of future rate cuts, particularly for the pivotal November meeting.
• Prepare for potential volatility in UK gilts and GBP around the November 26th Autumn Budget, as the government's fiscal response to the economic slowdown will be a key determinant of market direction and will influence the BoE's policy options.
• Consider adjusting UK equity exposure by underweighting industrials, given the sector's 0.9% output contraction, in favor of the more resilient services sector which demonstrated continued, albeit modest, growth.