UK economy grows by most since early 2025 on possible AI boost

Britain's economy expanded at its fastest annual pace in 18 months in July, driven by a boost from artificial intelligence, new figures revealed on Friday. This strong performance, despite challenges from the U.S.-Iran war, may influence the new finance minister's upcoming budget and could lead the Bank of England to consider a rate hike by year-end.

Official data showed British gross domestic product in July grew by 1.6% compared to the previous year, the fastest annual growth since February 2025, exceeding economists' 1.2% forecast. The economy also grew 0.4% month-over-month, surpassing expectations of unchanged output. James Smith, a developed markets economist at ING, noted that the UK's resilience was evident, with inflation rising less steeply than initially predicted.

Businesses, particularly those involved in computer programming benefiting from the AI boom, contributed significantly to the growth, according to Liz McKeown, the ONS director of economic statistics. Services also played a role in the July growth, with computer programming leading the way. Finance Minister John Healey acknowledged the economy's resilience but warned that growth remained fragile.

Sterling held steady against the U.S. dollar following the data release, with economists divided on whether the current economic outperformance would persist. The first half of 2026 saw the UK economy expand by 1%, the quickest growth among the Group of Seven advanced economies. Some analysts attribute this performance to seasonal factors, though growth may wane later in the year.

Matt Swannell, chief economic adviser to forecasters ITEM Club, suggested that growth might decelerate. Deutsche Bank's Chief UK Economist, Sanjay Raja, predicted a revision upward in full-year growth expectations by 0.1 percentage points after the latest data. The Bank of England had forecast a 1.1% increase for 2026, but Governor Andrew Bailey indicated the data since then had been stronger than anticipated.

Consumer confidence and business activity also improved over the summer following the leadership change at the helm of the Labour Party. While Britain has faced less immediate economic damage from the U.S.-Israeli war on Iran than expected, the conflict has driven oil prices above $105 a barrel, affecting government borrowing costs, which are now at multi-decade highs.

The Bank of England now anticipates inflation to climb to around 3.2% by the end of the year. Most economists polled by Reuters expect the central bank to maintain interest rates steady over the coming year, though financial markets believe a rate hike is likely by November due to stronger inflation pressures.