After signs of improvement earlier in the summer, the UK economy is once again struggling to build momentum, held back by persistent cost pressures and waning confidence. While some areas of activity remain resilient, the overall picture points to an economy finding it difficult to generate sustained growth.

Services and construction are continuing to provide support, but a combination of weaker industrial performance, softer labour market conditions and renewed inflationary pressures is creating headwinds. With policymakers cautious about loosening monetary policy too soon, the coming months will test the economy’s ability to navigate an increasingly uncertain environment.

UK economy flatlined in July

The UK economy recorded no growth in July, according to official figures, down sharply from growth of 0.4% in June. This slowdown reflected increases in output from services (+0.1%) and construction (+0.2%) being offset by falling production activity (-0.9%), with manufacturing particularly weak. UK GDP grew by 0.2% in the three months to July (a better measure of the underlying trend), down from 0.3% in June. There was growth in two of the three main sectors in the three months to July (see Chart 1), with a rise of 0.4% in the services sector and construction output grew by 0.6%, while production output fell by 1.3% over this period.

UK inflation to set to rise above 4% in September

UK inflation stood at 3.8% in August, unchanged from the previous month. The largest upward pressure on the headline rate came from fuel price increases and the cost of hotel accommodation falling less than this time last year. This was offset by the cost of airfares rising less than a year ago following the large increase in July linked to the timing of the summer holidays. Food prices rose for the fifth month in a row to an annual rate of 5.1%, the highest since January 2024. August’s unchanged inflation outturn could be followed by an unnerving upswing this month, with soaring business costs and food prices likely to see it breach the 4% mark in September, despite a weakening economy.

UK labour market continues to wilt

The number of payrolled employees for August 2025 dropped by 7,744 on the month, by 57,799 since the rise in National Insurance came into effect in April (see Chart 2) and by 126,953 over the past year. The increase in payrolled employees between August 2024 and August 2025 was largest in the health and social work sector (a rise of 80,000 employees). The largest fall was within hospitality (a fall of 90,000 employees).

The number of job vacancies, a good indicator of labour demand, fell by 10,000 in the three months to August 2025, the 38th consecutive period where vacancy numbers have dropped. The UK’s labour market is likely to encounter more adverse turbulence in the coming months as surging costs for businesses and weaker customer demand amid a slowing economy could mean the unemployment rate soon tops 5%.

Future interest rate path on a knife edge

The Bank of England kept interest rates on hold at 4.00%, the lowest level since February 2023. The Monetary Policy Committee member (MPC) eventually voted 7-2 in favour of this outcome, with the two dissenting members voting for a 0.25% rate cut. The near unanimous backing among policymakers to keep policy unchanged suggests that inflation worries are currently outweighing fears over the economy, leaving the chances of further rate cuts in the near term highly uncertain. Rate-setters will likely want to assess the impact of any measures announced in the Autumn Budget before loosening policy again, leaving December as the earliest point at which they may consider cutting rates.

The Bank of England also decided to slow the pace of government bond sales, known as qQuantitative tightening, aiming to now reduce its stock of government bonds to £70bn, down from its previous ambition of £100bn. The decision should help ease some of the pressure on the government from the UK bond market in the lead up to November’s Autumn Budget.

Economic uncertainty most common challenge impacting turnover

Official data revealed that in early September 2025, 28% of trading businesses reported that economic uncertainty was having an impact on their turnover, up three percentage points from early August 2025. This has consistently been the most reported challenge since October 2022 (see Chart 3). Competition was the second most reported challenge (22%), while for trading businesses with 10 or more employees, the cost of labour (36%) was the most reported challenge. Although broadly stable with early August 2025, this has been the most reported challenge since November 2024.

Implications for accountants, business owners and the economy

Overall, these figures suggest that it is probably the start of a more restrained period for the UK economy, with higher inflation and rising job losses likely to stifle activity in several key sectors, particularly given growing anxiety over the likelihood of more tax rises in Autumn’s Budget.

UK economy – what to watch for next month:

1. ICAEW's Business Confidence Monitor – one of the largest and most comprehensive quarterly surveys of UK business activity – will be launched on Thursday 9 October, covering the third quarter of 2025.
2. The monthly GDP data to be released on 16 October should confirm that the UK economy returned to growth in August, after flatlining in July.
3. The inflation figures for September due out on 22 October could see the headline rate rise above 4%