UK economy defies forecasts with surprise 0.4% growth in July

The UK economy grew in July as the rapid growth of AI appeared to outweigh the economic damage from the Iran war, in a welcome boost for John Healey before next month’s budget.Figures from the Office for National Statistics (ONS) showed a surprise 0.4% increase in gross domestic product (GDP), compared with 0.3% growth in June. City economists had forecast zero growth.The news suggested the economy continued to be resilient despite the fallout from the Iran war, which has raised energy costs and meant higher interest rates than were expected at the start of the year.The ONS said the expansion in July was driven by growth of 0.4% in the services sector, particularly admin services, and computer programming and consulting. Within the latter sector, it said, “many of the businesses reporting the largest turnover in July 2026 are involved in activities related to Artificial Intelligence and cloud computing”.Martin Beck, chief economist at WPI Strategy, said: “At a time when many traditional parts of the economy remain subdued, this is exactly the kind of productivity-enhancing spending the UK needs more of.”Industrial production was also up in July, by 0.2%, with a rise in manufacturing output offsetting falls in mining, and electricity and gas supply.Over the three months to July – a period the ONS says is more representative – GDP growth was also 0.4%, the same pace as in the three months to June.The economy’s continued strength is good news for Healey, the chancellor, as he prepares for his first budget, though experts have warned that the longer-term picture for the economy is less positive.Economists fear the latest rise in the global oil price – to well above $100 a barrel – is likely to stoke higher inflation worldwide, prompting rising borrowing costs.July’s unexpectedly robust growth followed a strong first half the year, when the UK was the fastest-growing economy in the G7 despite the onset of the conflict.Nevertheless, economists have warned the chancellor could be forced to increase taxes or cut spending at his first budget on 28 October in response to rising interest rates after the war in Iran triggered turmoil in global bond markets.However, economists said higher oil prices and stronger-than-expected growth are unlikely to prompt the England" class="entity-link entity-organization" data-entity-id="2477" data-entity-type="organization">Bank of England’s policymakers to raise interest rates when they meet next week.Suren Thiru, chief economist at accountancy body the ICAEW, said: “While these figures may strengthen the hawkish mood among rate-setters, a September rate rise still looks unlikely as most policymakers remain hopeful that a sluggish economy will ultimately help bring inflation under control, despite escalating US-Iran tensions.”PWC’s chief economist Barret Kupelian said: “Artificial Intelligence continues to have imprints across the UK economy, with AI exposed sectors - professional services, information technology, administrative services - recording strong growth. For example, computer programming, consultancy and related activities have grown by more than 25% over the past two and a half years.”The ONS’s director of economic statistics Liz McKeown added that “some businesses reported that the warm weather and Fifa World Cup had affected their activity, although effects differed across industries, benefiting some businesses while creating challenges for others.”