UK economy makes weak start to second half of the year

By David Milliken and Suban Abdulla

LONDON (Reuters) - Britain's economy recorded zero monthly growth in July after a sharp drop in factory output, matching expectations for a slower start to the second half of 2025 but still disappointing 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.

Finance minister 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 said.

But the much larger services sector edged up 0.1% on the month, slightly ahead of expectations in a Reuters poll. 

GDP had risen 0.4% month-on-month in June and on a three-monthly 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 BoE rate cut this year, with inflation this month expected to hit double the BoE's 2% target.

SECOND-HALF SLOWDOWN

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 22.244 billion pounds ($30.2 billion), up from 22.156 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, gross domestic product in July was 1.4% higher than a year earlier - unchanged from June's annual growth rate but a shade lower than the 1.5% growth forecast in a Reuters poll, 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 TO SET OUT PRO-GROWTH MEASURES

Reeves is hoping that measures to scale back regulation on things like construction permits in the run-up to her annual budget on November 26 will lead to a more favourable 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".

($1 = 0.7371 pounds)

(Reporting by David Milliken; editing by William James, Philippa Fletcher and Hugh Lawson)