The UK economy grew in July as the rapid expansion of AI appeared to outweigh the economic damage from the Iran war, in a welcome boost for John Healey.
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 figures suggested the economy continued to be robust despite the fallout from the Iran war, which has raised energy costs and led to 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, the 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.”
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.”
The ONS said 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 of economic conditions – GDP growth was also 0.4%, the same pace as in the three months to June.
Sanjay Raja, the chief UK economist at Deutsche Bank, said: “The UK growth story is becoming harder to ignore. Households and businesses are still spending – despite the unfolding energy shock impacting disposable incomes.”
The economy’s continued strength is good news for Healey, the chancellor, as he prepares for his first budget on 28 October, though experts have warned that the longer-term picture for the economy is less positive.
Healey said: “Britain’s economy is demonstrating a welcome resilience, despite serious global uncertainty. Our growth although still fragile was the fastest in the G7 in the first half of the year. But, the conflict in the Middle East does have impacts here at home – from the cost of the weekly family shop to the cost of government borrowing.”
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.
Higher interest rates on the UK’s debt are expected to have wiped out at least half of the £24bn headroom Healey’s predecessor had built up against the fiscal rules – potentially forcing him to increase taxes or cut spending at the budget.
Since the recent jump in oil prices, markets have raised their expectations for future interest rates and now expect the Bank of England’s policymakers to make four quarter-point rises over the next twelve months.
Rates are still expected to remain on hold, at 3.75%, when the Bank’s nine-member monetary policy committee meets next week, however, despite the stronger-than-expected growth figures.
Suren Thiru, the chief economist at the 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.”
As well as strong growth in AI-related sectors, the ONS highlighted the economic impact of the summer heat, and the World Cup, which culminated in mid-July.
Its director of economic statistics, Liz McKeown, said: “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.”
The shadow chancellor, Andrew Griffith said: “Nobody in this Labour government should be high-fiving themselves. Our construction and production sectors are shrinking, unemployment is up under Labour, and we’ve got the highest government borrowing rates in almost 30 years.”
