Rising costs, weak output: UK economy at critical crossroads

The ONS reported that industrial production fell 0.9% in July, while manufacturing output declined 1.3% over the quarter. In contrast, the services sector grew 0.4% in the quarter ending July, and construction saw a slight increase. As a result, the UK’s three-month growth rate slowed from 0.3% in the quarter ending June to 0.2% in the quarter ending July.

Economic media outlets have described this data as bad news for the Treasury ahead of the autumn budget. According to the announced schedule, the Starmer government plans to submit the budget amendment to Parliament on November 25. The new statistics have raised concerns about rising inflation, interbank interest rates, and taxes.

Meanwhile, business circles have warned of cost pressures on investment and employment, urging the government to avoid introducing new corporate taxes. The UK Treasury, for its part, has acknowledged that the economy is “stalled” and promised to facilitate growth by reforming regulations and reducing barriers.

At the policy level, the Bank of England is expected to keep the base interest rate at 4% in its upcoming meeting, even as July inflation stood at 3.8% and early signs point to a weakening labor market. Analysts say the government will likely have to make difficult fiscal decisions in the autumn budget to cover a deficit of £30–40 billion.

Statistics show that the UK economy experienced stronger growth in the first half of 2025, thanks to a surge in exports to the U.S. ahead of Washington’s trade tariffs, with a 0.7% expansion in Q1. However, from spring onwards, pressures from the U.S. trade war, weak goods trade, rising business costs, and budgetary uncertainty have slowed growth. With production stalling and demand fragile, the outlook for H2 2025 has darkened, and signs of structural recession have become more pronounced.

Analysts believe the UK economy is at a critical juncture. Growth is heavily dependent on the services sector, and weakening manufacturing could reduce the country’s global competitiveness. Meanwhile, cost pressures on households, high budget deficits, and trade limitations stemming from U.S. policies have cast doubt on the Starmer government’s ability to fulfill electoral promises on living standards and infrastructure investment.

Under these conditions, the government faces a difficult choice: either raise taxes and cut public spending to reduce the deficit—which risks deeper recession—or adopt expansionary policies and increase borrowing, risking market distrust and pressure on the pound. This economic dilemma could become one of the most serious political challenges for the Prime Minister and his economic team in the coming months.