The anticipated post-election bounceback in the UK economy failed to materialise as activity flatlined in July for a second month, according to the latest official data.

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

Although the economy grew by 0.5% in the three months to July, the weak performance of the economy during Labour’s first weeks in power came as a shock to the City, which had been expecting growth of 0.2% on the month.

The economy grew by 0.7% in the first three months of 2024, followed by a 0.6% expansion in the second quarter, but the latest ONS figures suggest the recovery from the mild recession in late 2023 has petered out.

The chancellor, Rachel Reeves, said: “I am under no illusion 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 does not make up for 14 years of stagnation.”

There was better news for the chancellor from the Organisation for Economic Co-operation and Development, which has revised up its growth forecasts for the UK after the unexpectedly strong performance of the economy in the first half of 2024.

The OECD, made up of 38 rich-country members, said it expected the UK to grow by 1.1% this year and by 1.2% in 2025, compared with the 0.4% for 2024 and the 1% for 2025 that it had predicted in May.

But while growth was picking up, the OECD said, the chancellor needed to look at tax reform as well as as increases in her forthcoming budget. “The UK faces a challenging economic environment of high interest rates and low growth limiting macroeconomic policy options,” it said in its annual economic report.

The second month of zero growth slightly pushed up market expectations that the Bank of England would cut interest rates for a second time in a row when policymakers meet on 19 September. Official borrowing costs currently stand at 5%.

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

Of the three main sectors of the economy, only one – services – recorded any growth in July, expanding by 0.1%. Production, which includes manufacturing, contracted by 0.8%, while there was a 0.4% drop in construction output.

Liz McKeown, the ONS director of economic statistics, said: “July’s monthly services growth was led by computer programmers and health, which recovered from strike action in June. These gains were partially offset by falls for advertising companies, architects and engineers. Manufacturing fell, overall, with a particularly poor month for car and machinery firms, while construction also declined.”

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

Before the release of the ONS figures, economists had thought the slowdown witnessed in June was temporary and caused by political uncertainty. Lindsay James, an investment strategist at Quilter Investors, said it was still possible the summer slowdown was a blip but said Reeves needed to be careful in her budget next month.

“Given the mood music emanating from the government and the economic inheritance it has received from the Conservatives, the government needs to be careful not to overcorrect with its narrative around tax rises and the potential this has to put off investment,” James said.

Anna Leach, the chief economist at the Institute of Directors business lobby group, said: “It is important that the forthcoming budget delivers a strong and positive message on growth. To reinforce business confidence to grow and invest, businesses need a predictable and efficient tax system, and growth-supporting policies.”