The United Kingdom’s economic momentum has notably faltered, with recent data revealing a concerning halt in Gross Domestic Product (GDP) growth for July 2025. This stagnation, following a brief resurgence in June, signals a challenging start to the latter half of the year and intensifies scrutiny on both fiscal and monetary policy decisions amidst a complex global landscape. The figures underscore a fragile recovery and present significant headwinds for businesses and households.
According to data from the Office for National Statistics (ONS), the UK’s GDP remained unchanged in July, a stark contrast to the 0.6% growth recorded in June. This flat performance pushed annual growth over the past year to a modest 1.4%, falling short of both expectations and the levels deemed necessary by policymakers. While the services sector, a dominant force accounting for approximately 80% of the UK economy, saw a marginal 0.1% expansion, and construction edged up by 0.2%, these gains were largely nullified by significant contractions elsewhere. Production output declined by 0.9%, and manufacturing experienced a notable 1.3% fall, marking its steepest monthly decline since July 2023.
Economists attribute this slowdown to a confluence of factors, including persistent cost pressures on businesses and households. Paul Dales, Chief UK Economist at Capital Economics, highlighted that the July figures reinforce the economy’s struggle to sustain momentum, as increased taxes and the specter of further interest rate hikes later in the year continue to weigh heavily. Businesses across various sectors are grappling with softer demand, a direct consequence of recent tax increases impacting consumer spending power and corporate investment decisions.
The Labour government, led by Prime Minister Keir Starmer, is banking on stronger economic growth to alleviate mounting financial pressures. Chancellor Rachel Reeves faces the arduous task of addressing a multi-billion-pound shortfall in public finances ahead of the autumn budget on November 26. Payroll tax hikes and a higher minimum wage are squeezing both companies and consumers, prompting some businesses to defer essential investments and individuals to curtail discretionary spending. The Treasury has acknowledged that continued economic stagnation undermines the foundational elements required for national development.
Despite the UK’s impressive performance as the fastest-growing G7 economy in the first half of 2025, the July data represents a significant setback. Momentum has demonstrably waned, with GDP expanding by a mere 0.2% in the three months to July, a sharp deceleration from earlier in the year. This deceleration coincides with persistently high inflation, which reached 3.8% in July—an 18-month high—keeping the Bank of England on high alert and disinclined towards policy loosening.
Looking ahead, economic activity is “set to soften” in the second half of 2025, according to Yael Selfin, KPMG’s Chief UK Economist. This outlook is predicated on dissipating temporary tailwinds, global economic headwinds, and a less robust manufacturing sector. Britain’s trade position also remains precarious; despite a marginal increase in exports to the United States in July (led by chemicals and machinery), the trade deficit with non-EU countries widened by £400 million over three months, reaching £10.3 billion. Furthermore, rising imports from the EU and existing US tariffs continue to exert pressure on UK trade. While the UK is still anticipated to achieve stronger third-quarter expansion than its major European counterparts, this growth may not be sufficient to fully address the profound fiscal challenges or meet calls for increased public spending.
The central bank faces a delicate balancing act: whether to prioritize economic growth or adhere strictly to inflation targeting. The current data points not to an economy in crisis, but rather one mired in a challenging state of stagnation, demanding strategic and carefully calibrated policy responses from both fiscal and monetary authorities.
David Thompson earned his MBA from the Wharton School and spent five years managing multi-million-dollar portfolios at a leading asset management firm. He now applies that hands-on investment expertise to his writing, offering practical strategies on portfolio diversification, risk management, and long-term wealth building.