Business & Finance

UK Economy Beats Forecasts in July, Boosted by AI-Driven Services Growth

By Today News Hours Editorial Desk

The UK economy grew by 0.4% in July, surpassing economists' expectations of zero growth, according to the Office for National Statistics (ONS). The unexpected expansion was largely driven by a strong performance in the services sector, particularly computer programming, with businesses increasingly adopting artificial intelligence technologies.

Liz McKeown, the ONS director of economic statistics, said evidence showed that AI-related business activity had contributed to growth not only in July but also in May and June. She noted that some businesses reported warm weather and the football World Cup had influenced activity levels in July, though the impact varied across industries, benefiting some while posing challenges for others.

July's growth followed a 0.3% expansion in June and no growth in May. Looking at the three months to July, which offers a clearer picture of underlying trends, the economy grew by 0.4% compared to the previous three-month period.

Chancellor John Healey said the economy was showing "welcome resilience" despite significant global uncertainty, noting that UK growth had been the fastest among G7 nations in the first half of the year. However, he acknowledged that the conflict in the Middle East was affecting the UK, from household shopping costs to government borrowing expenses. Healey, who is set to deliver his first Budget in October, has said he wants the public to feel confident about the economy despite challenges posed by historically high borrowing costs.

Paul Dales, chief UK economist at Capital Economics, said the July data confirmed the economy's resilience had continued from the first half of the year into the second. He cautioned, however, that rising energy prices and borrowing costs could soon begin to weigh on growth, particularly if recent increases persist.

The Bank of England is scheduled to meet next week to decide on interest rates. Most economists expect rates to remain unchanged, though some predict a possible increase before year-end.

Yael Selfin, chief economist at KPMG, cautioned that while the overall growth figure appeared strong, it masked weaker conditions for households. She noted that consumer-facing services contracted in July as retail and hospitality activity declined following earlier summer gains. Rising energy and fuel prices, along with elevated mortgage rates, are expected to continue pressuring household budgets and consumer spending.

Richard Carter, head of fixed interest research at Quilter Cheviot, said sustained growth may be difficult to maintain, especially as economic activity could slow ahead of the Budget. He pointed to the Middle East conflict as a continuing factor shaping economic data, noting the UK's particular exposure to its effects. Carter added that pressure for pro-growth measures would likely intensify as the Budget approaches, though it remains uncertain how much room the government has to act.