Economy of UK experiences another setback in July, with rate cut appearing unlikely
UK Economy Stalls in July, Raising Questions About Interest Rate Cuts
The UK economy experienced a stagnant period in July, with construction output falling by 0.4% and production output dropping by 0.8%, according to the Office for National Statistics. This marks the second consecutive month of no growth for the UK economy.
However, the services sector showed some resilience, growing by 0.1% on a monthly basis. On a three-month basis (May-July), the UK economy is estimated to have grown by 0.5%.
The weak economic growth in 2024 is primarily driven by several domestic and global factors. The Bank of England highlights downside risks to GDP growth mainly from weak consumer spending, potential labour market pressures, global trade uncertainty, and cautious central bank policy.
Households have exhibited a tendency toward higher saving rates, some of which might be precautionary due to heightened economic uncertainty, limiting consumption growth. The impact of higher labour costs on company employment decisions raises concerns about possible negative effects on jobs and incomes.
The uncertainty caused by tariffs, notably from US trade policies, weighs on UK exports and business investment confidence. The Bank of England has cut interest rates cautiously three times in 2025 to balance concerns about inflation and economic fragility.
Despite inflation creeping up to 2.2% in July, services inflation is starting to come down. Forecasts project continued subdued growth around 0.9% in 2026 before moderate improvement by 2027.
High wage bills and potential price increases for goods and services are causing concern among some policymakers. In response, resolving industrial disputes and maintaining transparency and positivity in government developments are key to improving the UK's economic growth outlook.
The Bank of England made its first rate cut on 1 August, and markets are currently pricing in around a 70% likelihood that rates will be kept on hold on 19 September. However, the weak growth in July has raised questions about the need for another interest rate cut to support economic activity while monitoring inflation risks.
One strategy for boosting the UK economy is persuading companies like Amazon to continue investing in tech services. Construction output grew by 1.2% on a three-month basis, marking its first positive contribution since September 2023.
The UK economy's brief and shallow recession at the end of 2023 has now been recovered from. However, the economy's current stagnant state raises concerns about its long-term growth prospects. The latest poll from Reuters shows that 65% of economists expect just one more rate cut from the Bank of England in 2024, most likely coming in November.
In the face of these challenges, it is crucial for policymakers to take decisive action to support economic growth and maintain consumer and business confidence.
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