UK Growth Stalls As Fiscal Policy Turns Cautious Markets Focus On Fed Rate Path

(MENAFN- Mid-East Info) By Daniela Sabin Hathorn, senior market analyst at Capital

·UK momentum fading: July GDP was flat; services barely grew while production fell, leaving a narrow, services-led expansion and a three-month growth pace slowing to 0.2%.

·Budget implications: Softer activity squeezes fiscal headroom, pushing the Chancellor toward targeted, fully costed, supply-side measures rather than broad tax cuts.

·Market backdrop: Equities stay supported by softer U.S. inflation and expectations of Fed easing; attention now shifts to the pace of cuts signaled by the vote split and the FOMC projections.

The latest data shows the UK economy failed to grow in July, following a 0.4% rise in June and a 0.1% fall in May. By sector in July, services grew 0.1% and construction 0.2%, while production declined 0.9%. This points to a fragile, services-led expansion that's losing momentum. July's flat monthly GDP, alongside a third straight slowdown in the three-month growth rate to 0.2%, suggests the post-spring rebound is fading. Services are still doing the heavy lifting (+0.4% over the three months), construction is modestly positive (+0.6%), but production is a clear drag (-1.3%). Consumer-facing services showed no growth in July, hinting that household demand remains patchy even as the overall level of activity is 1.4% higher than a year ago. Overall, the economy is expanding, but only slowly, with a narrow base in services and ongoing weakness in industry that leaves Q3 growth vulnerable to disappointments.

This makes the Chancellor's task harder at a time when fiscal scrutiny is mounting: there is more pressure to present a credible plan to lift growth, but less fiscal space for sizable giveaways. Softer momentum risks trimming tax receipts and squeezing the already-limited fiscal headroom identified by the OBR, nudging policy away from broad tax cuts and toward more targeted, fully costed measures. Markets will read this as a tilt to prudence unless the growth outlook materially improves. Given those constraints, the emphasis is likely to fall on low-cost, supply-side steps-accelerating planning and unblocking investment pipelines-to signal a pro-growth stance without a large near-term price tag. Recent moves to speed up planning approvals point in that direction.

Elsewhere, equity markets are looking to end the week on a strong note as the latest inflation data in the US paves the way for rate cuts from the Federal Reserve, which is thought to be focusing more on the labour market than inflation. The central bank has admitted in the past it is willing to tolerate one-off price shocks potentially caused by tariffs, so even if inflation remains on the higher end of 2% the latest employment data is enough to justify easy monetary policy next week, markets are sure of that. The key focus then, will be on any hints on the pace of future rate cuts, which may come from the vote split or the summary of economic projections from the FOMC.

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