UK economy flatlines in July in grim news for Rachel Reeves

The UK economy flatlined in July, registering 0.0% growth following a 0.4% expansion in June, with GDP increasing by a modest 0.2% in the three months to July. This slowdown, primarily driven by a 0.9% decline in the production sector despite services growth, led to a 0.2% weakening of the pound against the dollar and intensifies pressure on policymakers ahead of the autumn budget. Business groups attribute constrained growth to recent tax hikes and warn against further levies, while higher-than-expected inflation at 3.8% in July suggests the Bank of England is likely to maintain interest rates at 4%.

Analysis

The UK economy registered zero growth in July, a significant deceleration from the 0.4% expansion in June and a signal of a broader slowdown in the second half of the year. The more stable three-month growth figure also slowed to 0.2% through July. This stagnation was driven by a 0.9% contraction in the production sector, which offset modest growth in services and construction. The data reflects a challenging confluence of factors: a widening goods trade deficit, which grew by £3bn to £61.9bn in the three months to July, and higher-than-expected inflation, which reached 3.8%. This stagflationary environment creates a policy dilemma, prompting investors to price out further interest rate cuts and expect the Bank of England to hold rates at 4%. The weak growth figures, which contributed to a 0.2% fall in the pound to $1.355 against the dollar, intensify pressure on the government ahead of the November budget, where anticipated tax increases to shore up public finances may now face greater opposition and risk further dampening business confidence.

Key Decisions for Investors

• Given the combination of flat economic growth, persistent inflation, and a widening trade deficit, investors should consider hedging sterling (GBP) exposure as it is likely to remain under pressure.
• Investors should review UK equity allocations, potentially reducing exposure to the contracting manufacturing sector while favoring the more resilient service-based industries that demonstrated growth.
• Adopt a cautious stance on UK assets, particularly long-duration gilts, as the Bank of England's expected hold on interest rates at 4% and fiscal uncertainty ahead of the autumn budget will likely keep yields elevated and weigh on sentiment.