This morning has brought us up to date on the UK economy and the headline is good news.
UK gross domestic product (GDP) is estimated to have increased by 0.3% in Quarter 2 (Apr to June) 2025, following an increase of 0.7% in Quarter 1 (Jan to Mar) 2025.
So if we switch to the US way of counting we have 2.2% annualised which for these times is a good number. So we would even by ahead of the Forbin Constant albeit by a miserly 0.2%. At a time of pressure on the public finances it will help with metrics comparing with GDP and also suggests scope for rises in tax revenue.It would be a rally on the past year as well.
GDP is estimated to have increased by 1.2% in Quarter 2 2025, compared with the same quarter a year ago.
At this point the only worrying signal is that the rate of growth has approximately halved from the first quarter.
What happened this quarter?
In basic terms we see this.
In output terms, growth in the latest quarter was driven by increases of 0.4% in services and 1.2% in construction; while the production sector fell by 0.3%.
How many times over the years must I have typed the words that UK economic growth was driven by the services sector?! Those of you who have followed me over time will recall that the former Bank of England Governor Baron King of Lothbury promised a “rebalancing” from services to manufacturing in a classic case of how wrong can you be. The direction of travel has been the other way.
Also after the Bank of England interest-rate cut there was a fair bit of discussion on social media that more cuts were required to support construction which was struggling.That is supported by this.
Posting 44.3 in July, down from 48.8 in June, the headline S&P Global UK Construction Purchasing Managers’ Index™ (PMI®) – a seasonally adjusted index tracking changes in total industry activity – signalled the sharpest contraction in over five years at the start of the third quarter.
Care is needed as the July reading is outside of the second quarter. But June already showed a contraction and presumably was weakening. Indeed the same body told us this.
“June data highlighted a sustained downturn in UK
construction output, albeit at the slowest pace in six
months.
Yet the official figures show 1.2% growth broken down like this.
New work increased by 1.1% over the period, and repair and maintenance grew by 1.4%. Within new work, the largest positive contributor came from infrastructure new work, which grew by 3.2%. In repair and maintenance (R&M) the largest positive contributor came from private housing R&M, which grew by 3.3%.
So they have apparently picked up lots of repair and maintenance work that others have seemingly missed.
Services
Switching back to our largest sector the first breakdown shows pretty consistent growth.
Non-consumer-facing services (business-facing services) increased by 0.4% in Quarter 2 2025, while consumer-facing services increased by 0.3%.
The leader of the pack is below.
The largest positive contributor to growth was information and communication, which increased by 2.0%. Within this subsector, the largest contributor was from computer programming, consultancy and related activities, which grew by 4.1%.
Then we have a type of yellow alert after all the past problems in trying to measure health output.
The second largest positive contribution to growth was human health and social work activities, which increased by 1.1%. This was mainly because of non-market health, which is discussed further in the expenditure section.
There is the first issue that there was the change to using the output version of GDP which caused so much trouble in the pandemic period. Now we are being directed to the expenditure version which is inconsistent.
The growth in government consumption in the latest quarter mainly reflects higher expenditure on health (in particular on vaccinations)
I was unaware of the extra stream of vaccinations. Does anyone know what that is?
Not every category grew and below is the weakest.
The largest negative contributor to growth in Quarter 2 2025 was wholesale and retail trade; repair of motor vehicles and motorcycles, which fell by 0.9%.
Production
Here the growth story ends.
The production sector is estimated to have fallen by 0.3% in the latest quarter, following a 1.3% increase in Quarter 1 (Jan to Mar) 2025.
The cause of the decline gives me a wry smile because BBC Breakfast had their presenter Ben standing in front of some windmills talking about them being a driver of economic growth. Apart from the pantomime issue of “behind you” as they were barely turning the actual figures showed this.
The fall in production in Quarter 2 2025 was caused by declines of 6.8% in electricity, gas, steam and air conditioning supply, and 0.3% in mining and quarrying.
The electricity numbers do match the daily numbers I look at which in a broad sweep where supposed to see UK electricity exports in summer due to wind and solar and in reality we have been consistently importing implying their output has again disappointed.
There is a positive in here as we look at the manufacturing numbers.
In addition, manufacturing output grew by 0.3% in Quarter 2 2025, following growth of 1.1% in Quarter 1 2025, and is now 1.0% higher, compared with the same quarter a year ago.
It is concentrated in some sub-sectors rather than general.
The largest positive contributions were from the manufacture of pharmaceuticals, which grew by 7.0%, and the manufacture of machinery and equipment, which grew by 3.0%.
Over time the UK pharmaceutical sector has been a strength but 7%?
Monthly GDP
Here again we start with a positive headline number.
Monthly real gross domestic product (GDP) is estimated to have grown by 0.4% in June 2025,
At this point things are in line with the sunshine that has just come through my window.
Compared with the same month a year ago, GDP is estimated to be 1.4% higher in June 2025.
But if we look at the overall picture for monthly GDP my theme that it is too erratic to be any sort of reliable measure is further reinforced. How do you go 0.4%, -0.3%, -0.1% then 0.4%? Or rather as we are now told.
following an unrevised fall of 0.1% in May 2025 and a fall of 0.1% in April 2025 (revised up from a 0.3% fall in our previous publication).
This time around the monthly numbers for April and May were misleading as a guide for the quarterly number which is exactly the opposite of what they are supposed to be.
Also having raised the welcome but extraordinary pharmaceutical growth in the quarterly numbers we are told this.
The largest negative contribution within manufacturing came from the manufacture of basic pharmaceutical products and pharmaceutical preparations, which fell by 1.1% in June 2025, following a fall of 6.4% in May 2025.
Problems for the Bank of England
We can start with its forecasting as for all the claims about the Bernanke Review and improvements it has just got the first half of 2025 completely wrong.
GDP growth has been weaker than expected at the time of the November Monetary Policy Report, and indicators of business and consumer confidence have declined.
That was from the February Monetary Policy Report and in fact that quarter was seeing quite an acceleration in recorded economic growth to 0.7%.
Next up if we look back to the recent interest-rate cut is that they underestimated economic growth again as it was 0.3% rather than 0.1%. But there were some troubling inflation signals as well.
Nominal gross domestic product (GDP) grew by 0.8% in Quarter 2 (Apr to June) 2025 and is up 5.3%, compared with the same quarter a year ago.
If nominal GDP rises by 5.3% and real GDP by 1.2% then we have an ersatz deflator or inflation measure of around 4%. Again suggesting that the interest-rate cut was a mistake.
Comment
We can start with some more better news.
Real GDP per head is estimated to have grown by 0.2% in the latest quarter and is up 0.7% compared with the same quarter a year ago.
Hardly stellar but at least we have some. We can also welcome that net trade was positive with services exports doing well.
The increase in the latest quarter was mainly driven by a 3.0% increase in services exports,
But then we get something of a kicker because we know that fiscal policy is loose and we keep seeing deficits. Well it looks as though that has juiced the numbers.
Real government consumption expenditure grew by 1.2% in the latest quarter and is 1.7% higher, compared with the same quarter a year ago
That raised GDP in this quarter by 0.27%.
