UK economy doesn’t grow for a second month in a row

The Office for National Statistics (ONS) published data this month that showed that output in the UK economy did not grow in July compared to a month earlier (Figure 1). This follows on from no growth in June either.

Figure 1:

Looking at the main sectors of the economy only Services saw growth in July with its output increasing by 0.1% in the month following a 0.1% decrease in June. Output in the Production sector declined by 0.8% in July following growth of 0.8% in June. And output in Construction fell by 0.4% in July following growth of 0.5% in June.

Looking at a longer time period in the three months to July, the economy did see some growth with GDP increasing by 0.5% compared to the three months to April. With Services growing by 0.6% and Construction increasing by 1.2%, it’s the first positive three months growth since September 2023. However, output in the Production sector declined by 0.1% in the three months to July 2024.

UK inflation holds steady at 2.2% in August but core inflation rises amid mixed economic signals

In August 2024, UK inflation held steady with Consumer Price Index (CPI) inflation standing at 2.2% on an annual basis (Figure 2), the same level as in July, according to new data published by the ONS. This aligns with the average of expectations from economists, giving the Bank of England (BoE) some leeway to potentially reducing interest rates later this year. Persistent inflationary pressures in the services sector, where prices rose by 5.6% in August, up from 5.2% in July, contributed to inflation remaining marginally above the BoE’s central symmetrical inflation target of CPI inflation of 2% ± 1%. A sharp 22% rise in airfares, particularly to European destinations, was driving this figure according to the ONS which was partially offset by falling fuel prices and decreased costs in restaurants and hotels.

Figure 2:

Core inflation, which strips out volatile items such as food and energy, climbed to 3.6% from 3.3% in July. This has added to concerns about underlying domestic price pressures, although wage growth has softened, easing to 5.1% in the three months to July from 5.4% previously.

Despite these inflationary challenges, as noted above the overall UK economy has struggled to gain momentum, with output stagnating in both June and July, raising concerns about the broader economic outlook.

“Cheapflation” drives inflation inequality amid broader UK economic pressures

Although marginally above target, inflation is well down on the recent highs seen in the UK between 2021 and 2023, when cumulative inflation hit 26.6% over that period. A closer look reveals that inflation has not been experienced equally across income groups. According to a new report by the Institute for Fiscal Studies (IFS), “Cheapflation and the Rise of Inflation Inequality”, lower-income households bore a much heavier burden during this period. Those in the bottom decile experienced inflation rates 7.7 percentage points higher than wealthier households. This disparity highlights widening inflation inequality, which has been exacerbated by rising prices for cheaper goods—a phenomenon that the IFS refers to as “cheapflation”.

One of the key findings of the report is that cheaper product varieties, which lower-income households tend to rely on, saw much steeper price increases than more expensive alternatives. Over the 2021-2023 period, goods at the cheaper end of the spectrum saw an average price increase of 34.2%, compared to just 18.3% for products at the higher end. This trend contributed significantly to the inflation inequality seen across income groups, with poorer households being hit harder by rising prices.

Efforts to mitigate the impact of inflation through substitution- switching to other alternatives- provided only limited relief, especially for lower-income households. The report found that even though some households tried to manage costs by opting for less expensive products, the price of these items had also risen sharply, limiting their ability to offset inflationary pressures. In contrast, wealthier households, with more flexible consumption patterns, were better positioned to navigate the rising prices.

The report’s findings suggest that inflation inequality, driven by “cheapflation”, could have long-term implications for the UK’s economic recovery. As inflation continues to disproportionately affect lower-income households, there is a growing need for targeted policy interventions to address the widening economic divide. Fiscal measures, wage support, and consumer protection policies will be crucial in ensuring that the most vulnerable households are not left behind as the country finds a way through these inflationary challenges.

New research highlights the trade and supply chain disruptions of Brexit

The Brexit Trade and Cooperation Agreement (TCA) continues to significantly hinder UK-EU trade, with both exports and imports declining substantially since 2021 according to research in a new paper, “Unbound: UK Trade post-Brexit”, by Aston University. It reveals that UK exports to the EU have fallen by 17%, while imports are down 23% compared to pre-Brexit projections. The decrease in trade is attributed to a 33% reduction in the variety of goods being exported and a 28% decline in the value of imports per variety. These reductions are due to continued difficulties posed by new regulatory barriers, customs checks, and non-tariff measures, particularly impacting sectors such as agricultural products, textiles, and consumer goods. The paper also found that larger EU economies like Germany and France have experienced smaller trade declines with the UK, while smaller EU countries have been hit harder.

The report underscores that the UK-EU supply chain is being reconfigured, with UK firms increasingly looking to local and non-EU sources for intermediate and capital goods. However, the decline in trade varieties, particularly in exports, highlights how deeply Brexit has impacted UK trade competitiveness. Despite some sectoral resilience in areas like automotives and aerospace, the overall trend points toward a long-term structural change in trade dynamics rather than a temporary disruption.

Policy recommendations from the paper include targeting sector-specific adjustments to the TCA, such as reducing non-tariff measures in agriculture and textiles and improving customs procedures through digital technology. The UK government is also urged to pursue closer regulatory alignment with the EU to mitigate further trade deterioration. Despite these efforts, the UK’s relative performance in goods trade compared to peer economies has worsened, with ongoing trade barriers continuing to stifle economic growth.

Fed cuts interest rates for the first time in four years, signalling shift toward an easing cycle

Internationally central banks continue to loosen monetary policy. Thus the US Federal Reserve (Fed) cut interest rates by 0.5 percentage points in September’s meeting, lowering the federal funds rate to 4.75%-5% (Figure 3). This marks the first cut in over four years, signaling the start of an easing cycle as inflationary pressures reduce in the US and concerns about the labour market rise. The decision reflects the Fed’s intention to pre-empt any further economic weakening while maintaining inflation control.

Figure 3:

The Fed’s Chair, Jerome Powell, highlighted that the economy remains strong but acknowledged that inflationary risks have diminished, while employment risks are increasing with him saying “the labour market is in a strong place – we want to keep it there”, adding “that’s what we’re doing”. Future decisions will be based on ongoing economic assessments, with flexibility in either pausing or continuing rate cuts as necessary.

London’s return to the office continues but lags some other global cities

The Centre for Cities published its “Return to the office: How London compares to other global cities, and why this matters” report this month, showing that office attendance in central London has increased steadily since the pandemic. On average, full-time workers are now spending 2.7 days per week in the office, up from 2.2 days earlier in the year. This rise marks a gradual return to in-person work, but London still lags behind some other global cities.

In Paris, office workers are spending 3.5 days in the office on average, the highest among the six cities surveyed. New York follows with 3.1 days. London’s 2.7 days per week is just ahead of Toronto, which ranks lowest. Further, despite increasing, London has yet to return to pre-pandemic levels, although neither has Paris and New York fully reached their pre-pandemic levels either.

The report highlights that both employers and employees increasingly recognise the benefits of being back in the office. In fact, 95% of workers across all cities said that in-person work improves collaboration and relationship-building. Mandates have also tightened, with the proportion of workers having no in-office mandate falling from 25% to 7% in a year. Despite fears that stricter mandates could lead to employee turnover, only 9% of London workers indicated they would leave their job if asked to attend the office more frequently.

Looking ahead, while hybrid working patterns show no immediate negative impact on productivity, concerns about long-term effects on skills development and career progression have been raised, particularly for younger workers who benefit more from in-office work. The report highlights that to prevent London from falling behind cities like Paris, where higher office attendance could drive greater productivity, both government and businesses must take action.

GLA Economics will continue to monitor all these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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