The anticipated post-election boost in the UK economy failed to materialise, with official figures showing that activity remained flat for a second consecutive month in July. According to the Office for National Statistics (ONS), gross domestic product (GDP) showed no growth, following a similar lacklustre performance in June. This stagnation is seen as a continuation of the pre-election slowdown.

Economic performance stalls

While the economy expanded by 0.5% over the three months to July, the weak performance during the new Government’s early weeks surprised analysts who had predicted monthly growth of 0.2%. Despite a strong start to the year, with GDP increasing by 0.7% in the first quarter and by 0.6% in the second, the latest figures suggest that the recovery from the mild recession experienced at the end of 2023 has slowed.

However, there was some optimism for the Chancellor from the Organisation for Economic Co-operation and Development (OECD), which revised its growth forecasts for the UK upwards, reflecting the economy’s unexpectedly strong performance in the first half of 2024. The OECD, a group representing 38 advanced economies, now expects the UK to grow by 1.1% in 2024, an increase from its earlier projection of 0.4%. The forecast for 2025 has also been adjusted, with growth now expected to reach 1.2%, compared with the 1% previously predicted.

While the OECD’s revised outlook is a positive sign, it highlighted the UK economy’s challenges. The organisation called for a focus on tax reform and increases in the Chancellor’s upcoming budget. The report stated: “The UK faces a challenging economic environment, with high interest rates and low growth limiting macroeconomic policy options.” This signals that while growth may improve, difficult decisions lie ahead for the Government.

Interest rate outlook

July’s lack of economic growth has also influenced market expectations regarding interest rates. The Bank of England (BoE) met on 19 September to determine its next move, and the second consecutive month of zero growth has raised the possibility of another interest rate cut. Currently, the base rate stands at 5%, having been cut once already this year.

Of the three main sectors of the UK economy, only services recorded growth in July, albeit a modest increase of 0.1%. In contrast, the production sector, which includes manufacturing, contracted by 0.8%, and construction output fell by 0.4%. These declines in key sectors add to the overall picture of a stalled economic recovery.

In summary, while the UK economy showed resilience in the first half of 2024, recent figures indicate that growth has slowed since the general election. The Government faces the challenge of boosting economic activity in the face of high interest rates and slow growth, with potential taxation and spending reforms expected in the upcoming budget. 

Although the OECD’s revised growth forecasts are encouraging, the path ahead for the UK economy remains uncertain, and market attention is now focused on the upcoming budget in October.

The Chancellor, Rachel Reeves, said:

“I am under no illusion about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight. Two quarters of positive economic growth does not make up for 14 years of stagnation.”

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