UK economy slows down, piles pressure on Rachel Reeves ahead of budget

Abiola Olawale
Writer

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By Obinna Uballa

Britain’s economy flatlined in July, official figures showed Friday, intensifying concerns of a looming slowdown and raising the stakes for Chancellor Rachel Reeves as she prepares her first Autumn Budget.

Gross domestic product was unchanged on the month, the Office for National Statistics reported, in line with expectations and following 0.4% growth in June.

The flat reading came as industrial output shrank 0.9%, offsetting marginal gains in services and construction.

The July stall follows a surprisingly strong second quarter, when the UK posted 0.3% growth, the fastest in the G7. But economists warn momentum is fading fast.

“All signs point to a slowdown in economic activity in the second half of the year,” said Sanjay Raja, chief UK economist at Deutsche Bank. “Trade-fronting, stockpiling, public spending and other one-offs that supported growth earlier in the year are reversing.”

Reeves has pledged to fund spending through tax receipts and bring down debt, but weak growth risks complicating her fiscal arithmetic ahead of the Nov. 26 budget. Analysts say that could mean tax hikes.

“The stagnation in real GDP in July shows the economy is still struggling to gain momentum in the face of earlier tax rises, and possibly more to come in the Budget,” said Paul Dales, chief UK economist at Capital Economics.

The Bank of England, which trimmed rates to 4% in August, now faces a difficult balance between sluggish growth and stubborn inflation, which jumped to 3.8% in July, CNBC reported.

“The soft July data is unlikely to outweigh the Bank’s growing inflation concerns,” Dales said. Fabio Balboni of HSBC echoed that view, warning that “inflation resilience makes it harder for central banks to cut further” even as fiscal pressures mount.

The BoE is widely expected to hold steady at its September 18 meeting, but attention is turning to November 6, less than three weeks before Reeves’ high-stakes budget.

“We still expect a rate cut in November, though the hawkish August decision weakened our conviction,” said Carsten Brzeski, global head of macro at ING, according to CNBC.

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