The UK economy showed unexpected resilience in July 2026, growing by 0.4% despite global challenges, with AI and service sectors leading the way.
The UK economy demonstrated unexpected resilience in July 2026, with a 0.4% growth in gross domestic product (GDP), defying economists’ predictions of zero growth. This positive shift was largely driven by the rapid expansion of artificial intelligence and robust performance in the services sector particularly in admin services and computer programming.
The Office for National Statistics (ONS) reported that the growth was a welcome surprise, especially considering the economic fallout from the Iran war which had raised energy costs and led to higher interest rates. The ONS highlighted that many businesses involved in AI and cloud computing reported significant turnover increases, contributing to the
The Role of AI and Services in Economic Growth
The AI sector emerged as a key driver of economic growth, with many businesses reporting substantial increases in turnover. Martin Beck, chief economist at WPI Strategy, noted that this type of productivity-enhancing spending is exactly what the UK economy needs.
The services sector, particularly admin services and computer programming, saw a 0.4% increase further bolstering the economy.
Barret Kupelian, chief economist at PWC, emphasized that AI-exposed sectors such as professional services, information technology, and administrative services recorded strong growth. This trend underscores the growing influence of technology on the UK economy.
Industrial Production and Economic Conditions
Industrial production also saw a modest increase of 0.2% in July, with a rise in manufacturing output offsetting declines in mining and electricity and gas supply. Over the three months to July, GDP growth remained steady at 0.4% the same pace as in the three months to June. Sanjay Raja, chief UK economist at Deutsche Bank, noted that households and businesses continued to spend despite the economic challenges posed by the energy shock.
The continued strength of the economy is good news for Chancellor John Healey as he prepares for his first budget on 28 October 2026. However, experts caution that the longer-term economic outlook is less positive, with concerns about rising inflation and higher borrowing costs due to the recent increase in global oil prices.
The Impact of Global Challenges and Future Outlook
The recent rise in global oil prices, exceeding $100 a barrel is expected to stoke higher inflation worldwide, leading to rising borrowing costs. Higher interest rates on the UK’s debt are anticipated to reduce the fiscal headroom available to Healey, potentially forcing him to increase taxes or cut spending in the upcoming budget.
Despite the stronger-than-expected growth figures, the Bank of England’s monetary policy committee is expected to keep interest rates on hold at 3.75% when they meet next week. Suren Thiru, chief economist at the ICAEW, suggested that a September rate rise is unlikely, as policymakers remain hopeful that a sluggish economy will ultimately help bring inflation under control.
The ONS also highlighted the economic impact of the summer heat and the World Cup which culminated in mid-July. Some businesses reported that the warm weather and the World Cup affected their activity, benefiting some while creating challenges for others. Liz McKeown, director of economic statistics at the ONS, noted that the effects varied across industries.
Shadow Chancellor Andrew Griffith cautioned against complacency, pointing out that the construction and production sectors are shrinking, unemployment is rising, and government borrowing rates are at their highest in nearly 30 years. He emphasized the need for careful economic management to address these challenges.
