UK economy grows faster than expected in July, boosted by AI sector
UK GDP rose 0.4% in July, beating economists' forecasts of no growth, as the boom in AI and cloud computing offset economic damage from the Iran war.
Official data released this week showed the UK economy grew by 0.4% in July, surpassing both June's 0.3% increase and City economists' predictions of zero growth. The figures from the Office for National Statistics (ONS) offer a welcome sign for Chancellor John Healey ahead of next month's budget.
The data suggest the economy remains resilient despite the fallout from the Iran war, which has driven up energy costs and pushed interest rates higher than expected earlier this year.
Services lead the way
According to the ONS, July's growth was mainly driven by a 0.4% expansion in the services sector, particularly administrative services and computer programming and consulting. Many of the top-performing businesses in that sector are linked to artificial intelligence and cloud computing activities. Martin Beck, chief economist at WPI Strategy, described this kind of investment as exactly the productivity-enhancing spending the economy needs more of, at a time when many traditional sectors remain weak.
Industrial production also rose by 0.2% in July, as growth in manufacturing offset declines in mining and in electricity and gas supply. Over the three months to July — a period the ONS considers more representative — GDP growth held steady at 0.4%, matching the pace seen in the three months to June.
Longer-term concerns remain
While the figures are encouraging for Healey as he prepares his first budget on 28 October, economists caution that the longer-term outlook is less favourable. A rise in global oil prices to well above $100 a barrel threatens to fuel inflation and raise borrowing costs. Some economists warn the chancellor could be forced to raise taxes or cut spending in response to higher interest rates, triggered in part by turmoil in bond markets following the Iran war.
However, Suren Thiru, chief economist at the ICAEW, said a September rate rise from the Bank of England still looks unlikely, as policymakers hope a sluggish economy will help bring inflation under control. The ONS's Liz McKeown also noted that warm weather and the Fifa World Cup affected some businesses' activity in July, with mixed effects across industries.
