Today’s data confirms a slow but stable first half of 2025. GDP grew by 0.4 per cent in June, driven by stronger-than-expected services and construction activity.
Positive growth in June offset contractions in April and May, resulting in GDP growth of 0.3 per cent in the second quarter.
It is worth noting that growth in the second quarter was driven by government consumption, while household consumption grew more slowly and gross fixed capital formation contracted compared with the previous quarter.
This quarterly growth rate is in keeping with the medium-term trend of low but stable economic growth in the UK.
Last week, we published our Summer UK Economic Outlook in which we noted that the UK economy continues to be beset by headwinds. Business uncertainty continues to be elevated while household saving remains relatively high.
We forecast growth of 0.5 per cent in the third quarter as supportive fiscal policy and a slowing in labour market cooling counteracts fragile external conditions.
For the year, we expect GDP growth of 1.3 per cent, driven by government spending and the strong rebound in business investment recorded in the first quarter. We think that risks to growth are skewed to the downside.
From a global perspective, we see downside risks to growth associated with geopolitical conflict and tariff-related uncertainty. However, the most significant downside risk to our forecast stems from the precarious state of the public finances.
Speculation over fiscal tightening — and the tightening itself, should it occur — in the Autumn Budget will likely dampen economic activity over the remainder of the year. There is also a risk that the outlook for debt interest will worsen between now and autumn, further weakening an already fragile fiscal position.
The labour market is cooling but not deteriorating. Unemployment-to-employment transitions are elevated by historical standards while redundancies have remained stable. As noted in our latest Wage Tracker, upward pressure on unemployment is being driven by inflows from inactivity rather than outright job losses.
While differences between LFS employment and administrative payrolls data continue to cloud judgements on the labour market, payrolled employment exhibited only a slight fall in July (-0.03 per cent) and is prone to upward revision. Together, this data suggests that growth in the third quarter will be underpinned by a cooling but stable labour market.
Fergus Jimenez-England Associate Economist at the NIESR said, “GDP growth was slightly higher than forecast, recording 0.4 per cent in June owing to stronger-than expected growth in services and construction.
“The economy therefore grew by 0.3 per cent in the second quarter. Despite this positive surprise, we expect growth to remain subdued in the third quarter of this year as uncertainty over fiscal policy and international trade continues to weigh on economic activity.
“As outlined in our recent UK Economic Outlook, the Chancellor must build a substantial fiscal buffer in the Autumn Budget to avoid uncertainty plaguing growth into next year.”
