The UK economy flatlined in July, according to official figures, in grim news for Rachel Reeves as she gears up for a challenging budget.
It was a slowdown compared with June, when the economy grew by 0.4%, according to the Office for National Statistics.
GDP expanded strongly in the first half of the year, making the UK the fastest-growing economy in the G7, but it had been widely expected to slow in the second half.
The ONS said that growth in the services and construction sectors in July was offset by a 0.9% fall in the production sector, which includes manufacturing.
The downbeat data will raise questions about Labour’s promise to kickstart the economy.
A Treasury spokesperson said: “We know there’s more to do to boost growth, because, whilst our economy isn’t broken, it does feel stuck. That’s the result of years of underinvestment, which we’re determined to reverse through our plan for change.”
The ONS said that GDP grew by 0.2% in the three months to July, compared with the three months to April, down from 0.3% in the three months to June. Statisticians see three-month figures as a better guide to the underlying health of the economy than one-month data, which tends to be more volatile.
The ONS director of economic statistics, Liz McKeown, said: “Growth in the economy as a whole continued to slow over the last three months. While services growth held up, production fell back further.
“Within services, health, computer programming and office support services all performed well, while the falls in production were driven by broad-based weakness across manufacturing industries.”
The pound weakened after the news, to trade 0.2% lower at $1.355 against the US dollar by mid-morning in London.
Business groups have blamed Reeves’s £25bn increase in employer national insurance contribution, which came into force in April alongside a significant rise in the national living wage, for constraining growth.
The British Chambers of Commerce (BCC) responded to the data by warning Reeves against levying more taxes on business.
Stuart Morrison, the BCC’s research manager, said: “The business landscape remains challenging, particularly for SMEs [small and medium-size enterprises], with cost pressures impacting investment, recruitment and trade.
“The government has acknowledged it has asked a lot of business in the past year. Our message is now clear – there must be no more taxes on business in the autumn budget.”
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The chancellor is widely expected to have to present a package of tax increases when she delivers her second budget on 26 November, to compensate for an anticipated downgrade in the Office for Budget Responsibility’s forecasts.
However, after the news of zero growth in July, economists warned that speculation about tax increases was likely to continue weighing on confidence.
Fergus Jimenez-England, an associate economist at the National Institute of Economic and Social Research, said: “Economic activity in the third quarter will be constrained by fiscal uncertainty weighing on household and business sentiments. Growth at this pace will do little to ease the fiscal challenges confronting the chancellor this autumn.”
Daisy Cooper, the Liberal Democrats’ Treasury spokesperson, said: “The government talks of going full-throttle on growth but the reality is they have left the handbrake on.
“Their growth-crushing jobs tax risks hollowing out our high streets and ministers’ refusal to jettison their shortsighted red lines on cutting red tape with Europe is holding back our exporters.”
Trade data published alongside the GDP update showed the UK’s goods deficit widening by £3bn in the three months to July, to £61.9bn. The ONS said exports to the US rose by £800m in July but had not returned to the levels seen before Donald Trump’s tariffs were imposed.
The slowdown in economic growth comes alongside higher-than-expected inflation, which jumped to 3.8% in July, prompting investors to rein in expectations of further interest rate cuts from the Bank of England in the coming months.
The Bank’s nine-member monetary policy committee is expected to leave rates on hold at 4% when it meets next Thursday.
Jobs and inflation data, due to be published earlier in the week, will give more detail of the state of the economy – though policymakers have repeatedly warned that known flaws in ONS data are making it difficult to get a clear picture.
