UK economy set to shed first-half gains as construction slump weighs on June GDP

A consensus of economists tracked by Bloomberg expects the UK economy to have contracted by 0.1% in June, unwinding part of the modest expansion recorded in the first half of the year. The Office for National Statistics will publish the official figure on Thursday.

The projected decline reflects a sharp drop in construction output, which Pantheon Macroeconomics estimates fell by as much as 0.7% in the month, while services and production are both seen stagnating. Accommodation and food services are also expected to weigh on the headline number, though higher spending linked to the World Cup could provide a partial offset.

Construction drag deepens

Building firms have consistently reported cutbacks, and the latest monthly projection suggests the sector's brief spring rebound has already reversed. Analysts at Deutsche Bank note that warm weather in June boosted clothing retailers, pubs and art galleries, softening the overall blow, but they still expect the second quarter as a whole to contract by 0.5% after a 0.7% expansion in the first three months of the year.

"While large strategic investments continue to arrive, the broader corporate sector remains hesitant amid elevated uncertainty and a soft demand backdrop."

Sanjay Raja, chief UK economist at Deutsche Bank, said a steady pipeline of announced projects in data centres, clean energy and advanced manufacturing points to underlying strength in big-ticket capital spending, even as day-to-day business investment stays subdued. Government spending also likely provided a lift over the quarter.

Services picture mixed

Within services, the accommodation and food sub-sector is expected to drag, but the World Cup and sunny conditions supported consumer-facing businesses. Jack Meaning, an economist at Barclays, argues that forecasters have leaned too heavily on the S&P Global purchasing managers' index, which he says has recently failed to capture the true pace of activity shown in official releases.

Full-year outlook revised up

Despite the near-term weakness, the growth narrative for 2024 is shifting. The economy expanded 0.6% in the first quarter, beating expectations, and several City economists, including the National Institute of Economic and Social Research, have raised their second-half forecasts from around 0.2% to roughly 0.4%. Household consumption is proving more resilient than feared, with retail sales running above consensus, and fears that Middle East tensions would derail the recovery have so far proved unfounded.

Thursday's release will test whether the June dip is a one-off correction or the start of a softer patch. With business investment still cautious and construction in retreat, the balance of risks remains tilted to the downside for the third quarter.