LIVE MARKETS-Composition of UK services growth raises questions about its sustainability - Citi

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COMPOSITION OF UK SERVICES GROWTH HIDES VULNERABILITIES - CITI

The UK economy had a slow start to the second half of 2025, GDP data on Friday showed, recording zero growth in July, and while the services sector showed growth, vulnerabilities are hiding under the surface according to Citi economists.

The data lands at a time of heightened attention on the country's finances ahead of the UK budget in November.

Manufacturing output, which accounts for 9% of the economy, dropped 1.3% in July, while the more dominant services sector edged up 0.1%.

Like in Q2, the services data showed a strong performance in health activities and a fall in wholesale and retail trade, Citi economists point out. Consumer-facing services fell 0.6% quarter on quarter, even accounting for an offset in accommodation and food services

"The suggestion here is that government spending remains critical to growth while household consumers appear to be largely absent," says Citi.

They say this composition of services growth raises questions about its sustainability, particularly if finance minister Rachel Reeves' November budget is more contractionary than expected.

"Sustained weakness in consumer-facing services leaves growth uncomfortably exposed to fiscal contraction which, in turn, risks fully exposing the weakness in the manufacturing sector," they write.

The monetary policy implications are interesting, says Citi, though inflation remains the main focus in that respect. Even so, manufacturing weakness alongside risks to the labour market should encourage faster cuts.

"However, that growth remains positive (at least on a rolling basis), provides the cover to hold rates tighter. We think this will be the case until the data forces the MPC to pivot and not before," says Citi.

(Lucy Raitano)

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