Surprise Growth Defies Expectations
The UK economy grew by 0.4% in July, according to the Office for National Statistics, confounding City economists who had predicted no growth. The expansion followed a 0.3% rise in June and zero growth in May. Over the three months to July, GDP also increased by 0.4% compared with the previous quarter. The services sector drove the uptick, with computer programming among the strongest performers.[S1][S2]
Liz McKeown, the ONS director of economic statistics, noted that businesses linked to artificial intelligence and related technologies contributed to the sector's growth in July as well as in May and June. She added that some firms mentioned the warm weather and the football world cup as factors affecting activity, though she said the effects varied across industries, helping some businesses while creating challenges for others.[S2]
War and Borrowing Costs Cast Shadow
The growth figures arrive as the conflict in the Middle East continues to unsettle the global economy. UK government borrowing costs have climbed to their highest level in almost two decades, and economists warn that oil prices above $100 a barrel are likely to fuel higher inflation worldwide. Britain still recorded the strongest growth in the G7 during the first half of 2026, even as the war began.[S1]
Richard Carter, head of fixed interest research at Quilter Cheviot, cautioned that the stronger-than-expected July figure may not be sustained. He said growth will be hard to come by and activity is likely to stall ahead of the budget. He also noted that the war in the Middle East continues to drive much of the economic data, with the UK being the most exposed to its fallout. Calls for pro-growth measures are expected to intensify as the budget approaches, though it remains uncertain whether the government has the fiscal room to act.[S2]
Budget Pressure Mounts
Chancellor John Healey faces his first budget on 28 October. Economists have warned that rising interest rates, triggered by turmoil in global bond markets after the war in Iran, could force him to raise taxes or cut spending. The unexpected July growth offers some relief, but the underlying pressures from the conflict and elevated borrowing costs continue to weigh on the outlook.[S1]
