UK economy to ‘reverse gains’ as construction drags growth

The UK economy's recent progress from the first half of the year is expected to be undone due to the construction sector's slowdown, according to economists. A Bloomberg poll suggests that the UK GDP contracted by 0.1% in June, undoing previous gains. Pantheon Macroeconomics analysts warn that a significant decline in construction activity will further drag growth down, while services and production output will also stagnate.

June's official figures are due to be released on Thursday. The construction industry has faced persistent challenges, with many firms laying off workers. Despite moderate growth in recent reports, construction output is projected to fall by up to 0.7% in June. Accommodation and food services within the sector may also weigh down the UK economy.

However, higher spending due to the World Cup might positively surprise economists. Nonetheless, weak economic data in some major services sub-sectors will partly offset the previous gains. UK economy could still outperform expectations. Data released on Thursday may present some positive news for the UK economy compared to earlier forecasts.

The UK economy grew by 0.6% in the first quarter, surpassing economists' expectations. Some think tanks and City economists had previously forecasted growth of around 0.2%. Now, analysts predict growth of 0.4%, defying concerns that the Iran war would hinder growth and dampen business prospects. Deutsche Bank economist Sanjay Raja believes that household consumption will provide a modest boost to growth in the second quarter as retail sales have exceeded expectations.

The warm weather and England's underwhelming performance in the World Cup have helped maintain momentum, although business investment remains subdued. Deutsche Bank expects a contraction of 0.5% between April and June, compared to the 0.7% growth seen in the first quarter. While large strategic investments continue to arrive, the broader corporate sector remains cautious due to elevated uncertainty and a soft demand backdrop.

Raja also notes that government spending likely contributed to the UK economy's growth over the three-month period. Barclays economist Jack Meaning suggests that predictions may have been overly reliant on S&P Global's widely-watched purchasing managers' index, which has recently failed to accurately capture true growth changes reflected in the official release.