“Our economy isn’t broken, but it does feel stuck,” is the message from Rachel Reeves.
Having made rebooting the economy the No 1 priority for government, it is a brutally honest assessment from a chancellor more than a year into the job.
The latest GDP figures, released on Friday, highlight the scale of the challenge for Reeves at her autumn budget. Growth flatlined in July, slowing from 0.4% in June, as the economy struggled for momentum over the summer.
Some of the weakness can be explained away. Most economists had anticipated a slowdown after Britain recorded the strongest growth in the G7 in the first half of the year.
Manufacturers and exporters had rushed to beat the introduction of Donald Trump’s tariffs early in 2025. However, with US stockpiles now filled, and global uncertainty weighing on industry, new orders have slumped – reflected by a 1.1% plunge in manufacturing output in July.
Tax changes this spring had also pulled forward activity in the property market and influenced car sales, leading to more monthly volatility in the GDP numbers.
Households are under pressure from rising inflation. Consumer-facing services recorded no growth in July, despite a decent month for retailers as hot weather and England winning the Euro 2025 women’s football tournament helped to lift sales. But, taken together over the past three months, spending was in the doldrums, with a 0.6% slump in consumer-facing services.
The government also blames years of underinvestment under the Conservatives. But while it is evident that the economy has lacked a cash injection in recent years, there are also signs Reeves has added to the UK’s headwinds.
Economists highlight the damage to businesses and jobs from the chancellor’s first autumn budget. Reeves’s £25bn rise in employer national insurance contributions (NICs) in particular has been blamed for hitting hiring demand and sapping investment.
As the chancellor prepares for her second budget on 26 November, the challenge is considerable: growth is weak, yet tax increases or spending cuts could be required to cover an anticipated shortfall in the government finances.
Business leaders warn that any further tax rises would add to the considerable headwinds facing the economy, by sapping investment and hitting consumer spending. Government spending cuts would be hugely politically damaging. Bond market investors are watching closely.
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Among the big concerns is that speculation over the tax changes in the budget will dampen business activity over the coming months, even before November arrives, in a carbon copy of Labour’s first months back in office last year.
Meanwhile, the global backdrop remains challenging as Trump’s tariff policies weigh on international trade. Household finances in the UK are being squeezed afresh by elevated inflation, while pay growth is slowing – hitting consumer spending power.
On the more positive side, growth is clearly under pressure but is not collapsing. The latest snapshot of private sector business activity from the monthly services PMI suggested August was a robust month. Most economists – including those at the International Monetary Fund – anticipate growth this year of just over 1%. While historically weak, it is growth all the same despite the challenges.
Politically, however, a message that the economy is just about muddling through is hardly helpful. For the chancellor it will be a high-stakes challenge to unstick the British economy.
