July came in hot: GDP grew 0.4% on the month, building on June's 0.3% increase and marking a third consecutive beat versus economists' predictions. Services did the heavy lifting, up 0.4%, with computer programming the biggest contributor and AI-oriented firms standing out. Industry added 0.2% and construction gained 0.1%. Tally it up, and the monthly prints point to a 1.5% rise in output across January-July.
Early signs point to an economy holding up even after household energy bills increased 13% starting in July. The data position the UK more favorably heading into the third quarter than many anticipated, a period when the average economist projection was for growth to decelerate steeply to 0.1%. The UK also outpaced every other G7 economy in the first half, despite expectations that the energy price shock would weigh on businesses and consumers.
That sturdier backdrop could bolster Bank of England hawks who argued for hiking rates immediately at the end of July. Bloomberg Economics says the figures likely won't sway next week's BOE decision, but a more resilient economy raises upside risks to inflation and gives the central bank more room to hike later this year if energy prices keep climbing rather than holding through 2026.
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Sterling edged higher against the dollar after the release. Markets are pricing as many as four BOE rate hikes by next summer to counter inflation pressures tied to energy, and traders only slightly trimmed those bets when Friday trading began. Oil is back above $100 a barrel, energy bills are set to rise again in October, and bond market turmoil has driven government borrowing costs to decades-high levels.
The growth beat is a political lift for new Prime Minister Andy Burnham as he faces a tight fiscal situation after bond yields surged. Chancellor of the Exchequer John Healey has promised to cut back regulation and lower business costs to lift what he called "fragile" growth rates. He is also staring down a tricky Oct. 28 budget, with economists warning the bond market rout has eaten into an already thin fiscal buffer.
Burnham's government is relying on growth to generate tax revenue for plans in defense, public housing and social care. At the same time, Capital Economics warns that even with structural support from AI-related activity, rising energy and borrowing costs could soon weigh on real GDP, especially if this week's increases persist.
Economic momentum alongside higher energy and borrowing costs is a mixed bag for your wallet: stronger growth can support jobs and incomes, but stickier inflation risk can keep rate expectations elevated and influence tax and spending choices from Westminster.
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