‘Calm before the storm’: City warns Healey growth spurt won’t last

The UK economy saw a surprising summer growth spurt in July, expanding by 0.4 percent, according to initial figures released on Friday. However, economists have cautioned that this growth may be short-lived due to rising energy prices and increased borrowing costs. Julian Jessop, an economics fellow at the Institute for Economic Affairs, noted that while the UK economy performed better than expected in July, this improvement could be temporary.

"The calm before the storm," he remarked, as ongoing fiscal pressures from the US-Iran war loom over the government's budget. Yael Selfin, chief economist at KPMG, explained that the boost came primarily from the booming artificial intelligence and cloud computing sectors, which reported increased revenues during this period. However, Selfin cautioned that the government's fiscal space is likely to diminish due to elevated borrowing costs and significant spending pressures.

With existing fiscal headroom from the 2025 Budget potentially halved after a recent bond sell-off, Healey may face the challenge of raising taxes to adhere to the fiscal rules, which require day-to-day spending to match receipts by 2030. Richard Carter, head of fixed interest research at Quilter Cheviot, added that growth may be difficult to achieve, and calls for pro-growth measures may increase as the Budget approaches.

Healey, in his first major speech as Chancellor, emphasized Britain's economic resilience, despite global uncertainty, stating that the country's growth was the fastest in the G7 during the first half of the year.