The UK economy has encountered a period of stagnation, with official figures revealing no growth in July, marking the second month of economic flatlining. While the service sector experienced an uptick, particularly in health and computer programming, this was counterbalanced by declines in manufacturing and construction, raising concerns about sustainability.

Despite some positive signals, persistent challenges remain, including sluggish investment, low productivity and a rising youth unemployment rate. As the nation approaches the Budget, is the prospect of recovery likely given the weight of underlying economic pressures?

UK economy flatlines again

UK GDP didn’t grow at all in July, according to official figures, marking the second month running that the economy has levelled off. An increase in service sector output was offset by declining activity from the manufacturing and construction sectors (see Chart 1).

July’s monthly services growth was led by the health sector, which bounced back from industrial action in June, and computer programmers. The fall in manufacturing output partly reflected an especially poor month for car and machinery firms. The official figures also revealed that retailers and hospitality venues noted an uptick in activity in July due to the impact of the Euro 2024 tournament.

Retail sales at two-year high

Retail sales in Great Britain rose by 1.0% in August 2024, up from 0.7% growth in July. Compared with last year, sales rose by 2.5%, the biggest annual rise since February 2022. However, retail sales volumes are still 0.4% below the pre-COVID pandemic levels seen in February 2020. Warmer weather and end of season promotions helped to boost sales, most notably for textile, clothing and footwear stores (see Chart 2). Food sales rose by 1.8% in August, largely driven by the strongest month for supermarkets since July 2021.

UK inflation reaches difficult phase

UK CPI inflation held steady at 2.2% in August 2024, just above the Bank of England’s 2% target. The largest upward pressure on the headline rate came from air fares, in particular to European destinations. However, this was offset by the downward pressure on prices from lower fuel and hotel prices. Services inflation – an indicator of domestic price pressures – came in at 5.6% in August, up from 5.2% in July.

The direction for UK inflation over the rest of this year looks largely locked in, with the boost to demand from a growing economy and higher energy bills from October, following the increase in the Energy Price Cap, likely to put inflation on a slight upward trajectory until next year. 

Bank of England shifting towards November rate cut

The Bank of England kept interest rates at 5% with the Monetary Policy Committee (MPC) voting 8-1 in favour of this outcome. While this decision doesn’t mean the end of the rate-cutting cycle, it does suggest that the pace of policy loosening is likely to be slow, with some rate-setters still concerned that underlying inflation remains too high.

However, while only one rate-setter voted to loosen policy, the relatively dovish tone of the minutes suggest that the MPC is shifting towards cutting interest rates when it next meets in November. 

Young people struggling to enter the labour market

The UK’s unemployment rate dropped from 4.4% to 4.1% in the three months to July 2024 as the number of people out of work fell by 74,000 people. In contrast, young people are struggling to enter the labour market, with the unemployment rate among 18-24-year-olds rising from 11.8% to 13.3% over the same period, the highest rate since the three months to February 2021 (see Chart 3).

Separate HMRC data shows that over the past year, employers moved to hiring more experienced workers. The number of payrolled employees aged under 25 fell by 127,000 between August 2023 and August 2024, while payrolled employees aged 35 to 49 increased by 114,000 over the same period.

OBR makes case to increase public investment

Ahead of the Budget on 30 October, a new report by the Office for Budget Responsibility (OBR) has laid out the case for greater public investment. Its analysis found that a sustained 1% of GDP increase in public investment could increase the economy’s level of potential output by just under 0.5% after five years to around 2.5% in the long run. Public and private investment in the UK has averaged around 17% of GDP since the global financial crisis, the lowest in the G7.

Implications for accountants, business owners and the economy

The latest figures suggest that while economic conditions look positive in the run-up to the Budget, key underlying challenges remain, including anaemic investment, poor productivity and young people struggling to enter the jobs market.

The UK’s growth trajectory should slow further in the coming months with higher energy bills and expected tax rises likely to trigger renewed restraint in spending and investment, particularly as inflation starts to tick higher in the coming months. 

UK economy – what to watch for this month:

1. ICAEW's Business Confidence Monitor – one of the largest and most comprehensive quarterly surveys of UK business activity – covering the third quarter of 2024 will be released on 9 October.
2. Monthly GDP figures to be released on 11 October. The pickup in retail sales suggests that the UK economy expanded in August, following no growth in July and June.
3. Alongside the Budget on 30 October, Chancellor Rachel Reeves will present the OBR’s updated economic and fiscal forecasts.

Useful links

Read ICAEW’s economy explainers, where experts offer simple guides to help understand the technical, economic jargon used when discussing public finances and the economy.