The economy returned to stagnation in July. This might bring back memories from last year when the economy grew rapidly in the first half of the year before plateauing throughout the second. Unfortunately, growth will be a little harder to come by in the second half of this year as a weaker labour market and speculation over the Autumn Budget sap confidence. However, our analysis shows that the economy wasn’t as weak as it looked in July: it was volatile manufacturing output that dragged on the headline figure. Ultimately, we expect UK economic expansion to slow to around 0.2% q/q in the second half of the year. While it’s a clear step down from the figures for the first half of the year, it won’t be enough to tempt the Monetary Policy Committee (MPC) into a November rate cut.

Services sector growth supports UK GDP amid manufacturing volatility

The economy stagnated in July, disappointing after a strong June. This was largely due to a big contraction in manufacturing output, which fell 1.3% m/m, due to big falls in the notoriously volatile electronics, pharmaceuticals and chemicals sub-sectors. That alone was enough to knock 0.12ppts off July’s growth.

The good news is that in July the rest of the economy looked to maintain some of its recent strength. The construction sector grew 0.2% m/m, beating the dismal reading from the construction PMI, which fell to its weakest level since the pandemic.

More significantly, the all-important services sector grew 0.1% in July, despite weakness in business services such as IT, professional services and administrative and support services. Indeed, another strong month for the retail sector combined with a resurgence in transport, which fell in June, lifted the sector to growth. However, while retail did well, other consumer-facing services – including hospitality – flatlined as consumers continue to need lots of encouragement to open their wallets, which could drag on growth in the second half of the year.

Beyond the real economy, claims that the NHS handled the resident doctors’ strikes better than previous bouts of industrial action turned out to be true. Health output continued to grow strongly. This was the main reason services sector growth turned out to be stronger than expected.

What does the rest of 2025 hold for UK economic growth?

Consumers’ reluctance to spend is one reason why we forecast UK growth will slow in Q3 to around 0.2%. Growing speculation in the coming months around tax rises in the Autumn Budget is likely to sap confidence and could slow spending growth. This will be compounded by the after-effects of tax rises from the 2024 Autumn Budget, which will continue to drag on household incomes for the rest of this year.

On international trade, weaker global demand from US tariffs dampening growth across the global economy will reduce demand for UK exports, even if the direct impact of tariffs on the UK looks limited.

That all said, we do still think underlying growth is holding up better than the headline figures suggest. The composite PMI rose to its highest level in a year in August, suggesting the economy should return to growth. Indeed, assuming the economy recovers in August, it wouldn’t take much to lift growth to 0.3% for Q3. While that would still be a slowdown from the lofty highs of 0.5% q/q in the first half of the year, it suggests an upside risk to our view that the economy will grow 0.2% in Q3.

Ultimately, the UK economy’s performance in July wasn’t as bad as it first looked. We continue to expect growth of 0.2% q/q in Q3, despite the growing headwinds from pervasive speculation about further tax rises. This resilience is another reason for thinking the MPC will be in no rush to cut interest rates in November, opting instead to wait and see if a contractionary Autumn Budget will dampen demand and inflationary pressures. This scenario could create the space for further rate cuts.

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