A Midsummer UK GDP Wasn’t Dreamy

Not broken but “stuck.” That is how a Treasury spokesperson described the UK economy after GDP flatlined in July. With output flagging, many are calling for UK Chancellor of the Exchequer Rachel Reeves to refrain from tax increases in the autumn Budget. We won’t try to predict potential policy (nor do we think “help” or tax hikes are actually needed). Rather, our takeaway is that July monthly GDP extends existing trends—and puts growth in line with expectations earlier this year. The dour reaction indicates how low expectations for the UK are right now, and it likely won’t take much to positively surprise.

Monthly GDP slowed to a standstill in July (0.0% m/m) after June’s 0.4% growth.^[i] While services (0.1% m/m) and construction (0.2%) both grew, production contracted sharply (-0.9%) as manufacturing fell -1.3%.^[ii] Taking a step back, real GDP grew 0.2% in three months to July, prolonging a slowdown that started in April.^[iii] So, GDP does appear to have hit a summertime slow patch.

Looking under the hood, July manufacturing weakness centered on two industries: computer, electronic & optical products (-7.0% m/m) and basic pharmaceutical products and pharmaceutical preparations (-4.5%).^[iv] Unsurprisingly, many blamed tariffs—which is somewhat logical. Manufacturing weakness isn’t solely a UK phenomenon, as factories worldwide frontran potential US tariff implementation. Computer, electronic and optical product manufacturing this year hints at this bounciness. The category soared 9.8% m/m in February, when tariff chatter began to pick up, followed by a -8.5% drop in March.^[v] After some minor dips in April and May, this subsector jumped 8.8% in June—right as the US – UK trade deal came into force at the end of the month—before sliding -7.0% in July.^[vi]

But blaming tariffs oversimplifies UK manufacturing’s headwinds. The Pharmaceutical industry’s recent struggles seemingly stem from concerns about the National Health Service’s (NHS’s) drug pricing system along with confidence issues surrounding pharmaceutical companies’ UK investment plans. One narrow industry having an outsized effect on headline GDP isn’t an anomaly, especially over short timeframes like a month (see February GDP, which reflected metal manufacturing weakness). While the production sector’s stumbles got eyeballs, services—which comprise close to 80% of UK GDP—grew a third straight month, with 7 of 14 subsectors growing.^[vii]

If you take a step back, UK GDP also appears to be in line with early-year forecasts. Real GDP’s 0.2% growth in the three months to July equates to 0.8% annualized growth.^[viii] That is by no means a robust rate, but it would be in line with early-2025, pre-Liberation Day projections. In February, the Bank of England (BoE) forecast UK GDP growth of 0.75% for 2025.^[ix] This downward revision (from its previous estimate of 1.5%) wasn’t even due to tariffs. Rather, the BoE worried a decline in business and consumer confidence would weigh on output. Interestingly, declining consumer confidence didn’t fully translate to weaker activity, either. While consumer-facing services output also didn’t grow in July, this was due to a big detraction from motor vehicle and motorcycle trade.^[x] Excluding motor vehicles and motorcycles, retail trade grew 0.6% m/m in July—countering tapped-out consumer concerns.^[xi]

The BoE isn’t the only outlet that makes forecasts, but its outlook gives a sense of where expectations were at the start of 2025, before tariffs took effect and sent projections reeling. Despite larger-than-anticipated US tariffs and associated uncertainty, UK GDP has been in line with that so far through July—a testament to the country’s economic resilience and a sign of how moods have become more pessimistic this year despite UK GDP growth matching with broad expectations.

UK GDP growth has been mixed this year. While services has generally expanded along, there have been weak spots. Last month we noted Q2 business investment’s sharp plunge—in line with a choppy trend, but indicating some tariff uncertainty. Long-running weak pockets, including North Sea oil production and the steel industry, have detracted. But gangbusters economic growth isn’t a prerequisite for markets to do well. Rather, stocks move most on the gap between expectations and reality. In practice, lackluster GDP growth can produce some positive relief if the consensus projects something worse (e.g., economic contraction). The proof is in the pudding: The MSCI UK Investable Market Index is up 25.4% year to date in USD, well ahead of the MSCI World’s 15.9%.^[xii] As pundits warn global trade uncertainty and potential tax hikes will roil growth, the UK economy continues to plod along—good enough to boost stocks up the proverbial wall of worry.