The UK economy grew faster than expected in July, offering Chancellor John Healey a boost as he prepares for next month’s Budget, although economists warned that higher energy prices and borrowing costs could undermine the recovery.
Gross domestic product increased 0.4 per cent in July, according to figures from the Office for National Statistics, exceeding economists’ expectations for no growth. The expansion followed a 0.3 per cent increase in June and no growth in May.
The stronger-than-expected figures will provide some support for Healey, who said earlier this week that the UK economy was “turning a corner”.
Services were the main driver of July’s performance, while the ONS said artificial intelligence and related technology had contributed to growth over the past three months. On the monthly measure, services output increased 0.4 per cent, production rose 0.2 per cent and construction expanded 0.1 per cent.
Liz McKeown, ONS director of economic statistics, said businesses had also reported an impact from unusually warm weather and the FIFA World Cup.
“Separately, as in June, some businesses reported that the warm weather and FIFA World Cup had affected their activity, although effects differed across industries, benefitting some businesses while creating challenges for others,” she said.
The data come against a more difficult international backdrop. The conflict in the Middle East has pushed oil prices above $100 a barrel and contributed to renewed concerns over inflation, while UK government borrowing costs have risen to their highest levels in almost two decades.
Britain nevertheless recorded the strongest economic growth among G7 countries during the first half of 2026, although the outlook has become more uncertain as energy costs rise.
Economists said July’s figures were unlikely to prompt the Bank of England to raise interest rates this month.
Martin Beck, chief economist at WPI Strategy, said the economy had “retained more momentum than many had feared”, but warned that “the question now is whether this strength can be sustained as the economy faces a more difficult backdrop.”
“The renewed rise in oil prices to above $100 a barrel is a significant headwind,” he said. “If sustained, higher energy costs will lift inflation, squeeze household spending power and make the Bank of England’s job more difficult.”
“The priority for government should be to reinforce that momentum rather than undermine it through higher taxes on investment or prolonged policy uncertainty.”
Suren Thiru, chief economist at the ICAEW, said July’s growth had “confounded expectations”, helped by warmer weather and a World Cup boost. But he warned it could prove the “high-water mark for growth in Q3” as higher energy bills and uncertainty ahead of the Budget weigh on activity.
A weaker economy combined with higher borrowing costs could leave Healey with a “Budget headache”, potentially increasing pressure for further tax rises, Thiru said.
“A September rate rise still looks unlikely,” he added.
Joe Nellis, emeritus professor and head of economic research at MHA, said the figures provided “cause for optimism” and demonstrated “resilience in recent months”.
But he warned that significant increases in business taxes could “put the brakes on growth”, while high bond yields and weaker activity would add to pressure on the public finances.
“It is vital that the government converts a short-term boost into long-term, sustainable growth,” Nellis said.
Leave a Comment