Britain's economy stagnated in July, as a steep fall in factory output offset gains elsewhere, in line with forecasts for a sluggish start to the second half of 2025 but posing a setback for the government ahead of November's budget.
After a strong first half to the year, economists expect growth to slow over the second half as a whole as U.S. tariffs continue to weigh on the global economy and Britain faces headwinds from rising inflation and uncertainty over who will be hit by likely tax rises later this year.
Treasury chief Rachel Reeves said on Thursday that the economy "isn't broken, but it does feel stuck" as she set out measures to streamline part of the tax system.
Friday's data showed that manufacturing output – which makes up 9% of the economy – dropped by a hefty 1.3% on the month in July, its biggest fall in a year led by computers, electronics and pharmaceuticals, the Office for National Statistics (ONS) said.
But the much larger services sector edged up 0.1% on the month.
GDP had risen 0.4% month-over-month in June and on a three-month basis – now the ONS' preferred way of presenting the figures – growth slowed to 0.2% in the three months to July from 0.3% in the second quarter.
"July's slowdown is probably the start of a more restrained period for the economy with higher inflation and rising job losses likely to have stifled activity in August, despite an expected uplift from the warm weather," said Suren Thiru, economics director at the ICAEW accountancy body.
Sterling weakened slightly after the data before recovering and financial markets continued to price in only around a 40% chance of another Bank of England (BoE) rate cut this year, with inflation this month expected to hit double the central bank's 2% target.
Britain's economy grew robustly by its recent standards in the first half of 2025, expanding by 0.7% in the first quarter of the year and 0.3% in the second – partly due to higher government spending and exporters trying to ship goods before the imposition of U.S. tariffs.
Friday's figures showed Britain's goods trade deficit widened in July to its largest since January 2022 at 22.24 billion pounds ($30.2 billion), up from about 22.16 billion pounds in June.
British goods exports to the United States remain below pre-tariff levels, although the widening in the deficit from June to July mostly reflected higher imports from the European Union.
On an annual basis, GDP in July was 1.4% higher than a year earlier – unchanged from June's annual growth rate, official figures showed.
Last month, before the release of second-quarter data, the Bank of England forecast annual growth of 1.25% for this year – well below the average of 2% between 2010 and 2019.
"The continued reluctance of consumers to open their wallets is concerning," said, Thomas Pugh, chief economist at accountants RSM UK, adding that data looked in line with a BoE forecast for 0.2% growth in the third quarter.
Reeves is hoping that measures to scale back regulation on things like construction permits in the run-up to her annual budget on Nov. 26 will lead to a more favorable assessment of Britain's prospects from the Office for Budget Responsibility and lower its projections of future borrowing.
A Finance Ministry spokesperson blamed the weak outturn in the latest data on "years of underinvestment," which the new government, in power since July 2024, was taking steps to reverse.
But some businesses say they are keeping hiring and investment plans on hold, as they await details of tougher employment legislation and whether they will be the main target again for tax rises.
The opposition Conservative Party's would-be finance minister, Mel Stride, highlighted a rise last week in 30-year borrowing costs to their highest since 1998 which he said "makes painful tax rises all but certain."
