The expected post-election recovery in the UK economy failed to materialise, with activity stagnating for the second month in a row in July, the latest official data showed.

The Office for National Statistics (ONS) said the pre-election slump in activity in June was followed by another month in which gross domestic product remained unchanged.

Although the economy grew by 0.5 percent in the three months to July, the weak economic performance during the Labour Party’s first weeks in power came as a shock to the City, which had expected growth of 0.2 percent for the month.

In the first three months of 2024, the economy grew by 0.7%, followed by a 0.6% expansion in the second quarter. However, the latest figures from the ONS suggest that the recovery from the mild recession has stalled at the end of 2023.

Chancellor Rachel Reeves said: “I have no illusions about the scale of the challenge we face and I will be honest with the British people that change will not happen overnight. Two quarters of positive economic growth cannot make up for 14 years of stagnation.”

The second month of no growth slightly raised market expectations that the Bank of England would cut interest rates for a second consecutive time at its meeting on September 19. Official borrowing costs currently stand at 5%.

Ruth Gregory, UK economist at Capital Economics, said: “For now, we maintain our view that the Bank of England will keep rates unchanged in September before cutting again in November. But today’s data has made a rate cut next Thursday slightly more likely.”

Of the three main economic sectors, only one – the services sector – recorded growth of 0.1 percent in July. Production, which includes manufacturing, shrank by 0.8 percent, while production in construction fell by 0.4 percent.

Liz McKeown, director of economic statistics at the ONS, said: “Monthly growth in the services sector in July was led by computer programmers and health, which recovered from strikes in June. These gains were partly offset by declines in advertising firms, architects and engineers.”

“Production declined overall, with the month being particularly bad for automotive and engineering companies, while the construction sector also recorded declines.”

The ONS said GDP levels in the three months to July were 1.1% higher than in the same three months of 2023.

Before the ONS figures were released, economists had assumed that the slowdown observed in June was temporary and caused by political uncertainty.

Lindsay James, investment strategist at Quilter Investors, said it was still possible that the summer lull was just a blip, but said Reeves would need to be cautious in her budget planning next month.

“Given the sentiment emanating from the government and the economic legacy it has received from the Conservatives, the government needs to be careful not to overcorrect with its narrative of tax increases and the potential for that to deter investment,” James said.

Anna Leach, chief economist at the business lobby group Institute of Directors, said: “It is important that the upcoming budget sends a strong and positive message on growth. To boost business confidence in growth and investment, they need a predictable and efficient tax system and growth-enhancing policies.”