UK economy makes weak start to second half of the year

Britain's economy recorded zero monthly growth in July, primarily due to a significant 1.3% drop in manufacturing output, signaling a weaker start to the second half of 2025 following a strong first half. This slowdown, alongside a widening goods trade deficit to £22.244 billion and concerns over consumer spending, reinforces expectations for a more restrained economic period ahead, with inflation projected to double the Bank of England's 2% target and a limited 40% chance of a rate cut this year.

Analysis

The UK economy exhibited clear signs of stagnation at the start of H2 2025, with monthly GDP growth registering at zero for July. This halt in momentum, following a 0.4% expansion in June, was primarily driven by a significant 1.3% month-on-month contraction in manufacturing output, its most substantial drop in a year. While the larger services sector provided a marginal offset with 0.1% growth, the overall picture confirms a broader slowdown, with three-month growth easing to 0.2%. The economic outlook is further pressured by a widening goods trade deficit, which hit £22.244 billion—its largest since January 2022. This slowdown aligns with Bank of England forecasts but occurs amidst a challenging environment of high inflation, expected to reach double the 2% target, and significant policy uncertainty. Consequently, financial markets are pricing in only a 40% chance of a BoE rate cut, while rising long-term borrowing costs signal that fiscal tightening through future tax increases is becoming increasingly probable, creating headwinds for both business investment and consumer spending.

Key Decisions for Investors

• Given the confirmed economic stagnation and significant headwinds from inflation and fiscal policy, investors should consider adopting a more defensive posture towards UK-centric assets, particularly in cyclical sectors.
• The 1.3% contraction in manufacturing warrants a review of exposure to UK industrial and export-oriented companies, which appear highly vulnerable to both the domestic slowdown and global trade frictions.
• Anticipate limited upside for UK government bonds (gilts) and potential for further weakness in Sterling (GBP), as persistent inflation constrains the Bank of England from cutting rates while a widening trade deficit weighs on the currency.
• Investors should closely monitor upcoming UK inflation data and details from the November budget, as these will be key catalysts determining the path of monetary and fiscal policy.