UK economy grows 0.4% in July as AI-linked services drive output

Britain's economy expanded faster than expected in July, with output rising 0.4% on the month against forecasts of no change, official figures showed on Friday. On an annual basis, gross domestic product was 1.6% higher than a year earlier — the strongest pace since February 2025 and above the 1.2% economists had projected.

Output over the three months to July, a measure that smooths monthly volatility, also grew 0.4%, comfortably ahead of expectations.

The Office for National Statistics attributed much of the recent momentum to businesses in computer programming that are benefiting from the artificial intelligence boom. Services led growth in July, with software development making the largest single contribution, according to Liz McKeown, the ONS director of economic statistics. She also noted that the men's soccer World Cup and unusually hot weather gave some firms an additional lift.

The pound was little changed against the dollar after the release, as analysts debated whether the run of strong data can last. In the first half of 2026, Britain's economy grew 1%, the fastest among the Group of Seven advanced economies, though some economists suspect seasonal factors that have not been fully adjusted for may be flattering the figures.

"We're starting to reach the point in the year where we expect growth to peter out," said Matt Swannell, chief economic adviser to forecasters ITEM Club. Others were more upbeat. Deutsche Bank's chief UK economist, Sanjay Raja, said the UK growth story was becoming harder to ignore and predicted forecasters would raise their full-year projections by about 0.1 percentage points.

The Bank of England had pencilled in 1.1% growth for 2026, and Governor Andrew Bailey told a parliamentary committee earlier this week that recent data had come in somewhat stronger than he anticipated.

Still, risks are mounting. The U.S.-Israeli war on Iran pushed oil prices above $105 a barrel this week, feeding into government borrowing costs that are already at multi-decade highs. The central bank expects inflation to climb to around 3.2% later this year. While Britain and other European economies have so far absorbed less damage from the conflict than initially feared, most economists expect the Bank to hold interest rates steady next week and through the rest of the year. Financial markets, however, increasingly price in a rate rise in November as inflationary pressures build.

The figures land ahead of finance minister John Healey's first budget next month, with the growth picture likely to shape the fiscal choices ahead.