Tax hikes weigh on businesses and households as growth stalls

The UK economy stalled in July, signaling a sluggish start to the second half of 2025. Data from the Office for National Statistics (ONS) showed GDP was unchanged from June, which had seen 0.6% growth.

While economists had anticipated a slowdown, the figures highlight the fragile state of the recovery. Annual growth over the past year reached just 1.4%, falling short of expectations and below the levels policymakers would hope for. The services sector, representing around 80% of the UK economy, expanded by a mere 0.1%, while construction rose slightly by 0.2%.

These modest gains were offset by a 0.9% drop in production and a steep 1.3% fall in manufacturing, the largest monthly decline since July 2023. Paul Dales, chief UK economist at Capital Economics, noted that the July slowdown underscores the economy’s struggle to maintain momentum, with businesses and households facing higher costs from tax increases and the potential for further interest rate hikes later this year.

Tax pressures weigh on businesses amid sluggish demand

Businesses across sectors are experiencing soft demand, as recent tax hikes weigh on spending. Prime Minister Keir Starmer’s Labour government is banking on stronger economic growth to ease the financial pressures on the economy.

The chancellor, Rachel Reeves, is under pressure to close a multibillion-pound hole in the public finances ahead of the autumn budget on November 26. Payroll tax hikes and a higher minimum wage squeeze companies and households, increasing additional taxes. 

As a result, some businesses are deferring investment, while consumers are cutting back on discretionary spending. A Treasury spokesperson acknowledged that if the economy remains stagnant, the absence of growth shows that the foundation for the country’s development is missing.

The disappointing July numbers are a setback for labour, which has maintained its best record of fastest growth with the world’s G7 countries during the first half of 2025. Yet momentum has slowed. GDP rose just 0.2% in the three months to July, down from stronger growth earlier in the year.

Inflation and interest rates increase uncertainty

The Bank of England is watching the data carefully as inflation remains above target for a given year, and central banks do not want policy loosening at this early stage. As recently reported by Cryptopolitan, the UK’s July inflation reached 3.8%, marking an 18-month high.

Economists were predicting in private that growth would slow during the second half of 2025 because of global headwinds, less robust manufacturing activity, and a weakening labour market. Yael Selfin, KPMG’s chief UK economist, said economic activity was “set to soften” as support from temporary tailwinds boosting growth in the year’s first half dissipates. She also mentioned that Britain’s trade position continued to be fragile.

Although exports to the US rose marginally in July, led mainly by chemicals and machinery, the trade deficit to non-EU countries widened by £400 million over three months to reach £10.3 billion. Imports from the EU rose, and the US tariffs on UK goods continue to weigh on trade. The UK is still anticipated to have a stronger third quarter of expansion, faster than its major European peers. However, the rise might fall short of addressing fiscal pressures. 

It may slow as pressure from demand-side arguments continues to call for more public spending so that the government can put pressure on economic stimulus. Rachel Reeves has to meet the public’s hopes in a shrinking fiscal space.

The key question is whether the Bank of England will prioritise growth over strict inflation targeting. The data suggest the economy isn’t in crisis, but stuck in a state of stagnation.

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