The UK economy grew by 0.4% in July, defying forecasts of stagnation and providing an unexpected boost for the government ahead of next month's budget. The Office for National Statistics said gross domestic product increased by 0.4% on the month, up from 0.3% growth in June.
Economists had widely expected the economy to show zero growth for July, making the latest reading a significant upside surprise. The figures suggest the UK retained momentum through the summer despite mounting external pressures, including the economic fallout from the Iran war.
The growth was driven in part by the services sector, with activity linked to artificial intelligence helping to offset weakness elsewhere. The ONS data pointed to a broad-based expansion, though the detail underlined the economy's growing dependence on technology-related demand at a time when traditional drivers remain fragile.
The result comes as borrowing costs and inflation risks continue to mount. Financial markets have been unsettled by persistent price pressures and the prospect of higher government borrowing, with the conflict in the Middle East adding further uncertainty to the energy outlook. The squeeze on household and business energy costs remains a live concern, even as the headline growth number beat expectations.
For John Healey, the growth figures offer welcome news in the run-up to his first budget. The chancellor has been under pressure to balance support for growth against the need to keep the public finances on a sustainable path, and a stronger-than-expected July reading gives him slightly more room for manoeuvre in framing his fiscal plans.
Analysts cautioned that a single month's data does not alter the wider picture. The economy has been growing only modestly through 2026, and the July uptick may prove difficult to sustain if energy costs rise further or if global conditions deteriorate. The Iran war has already disrupted trade routes and pushed up input costs for some sectors, and its full effect on UK activity may not yet be visible in the official statistics.
The ONS figures also come against a backdrop of volatile inflation and elevated interest rate expectations. Borrowing costs for the government have risen in recent weeks, reflecting investor concerns about the fiscal trajectory and the risk that price growth proves stickier than anticipated. A stronger growth print could ease some of that pressure, but it also complicates the case for near-term interest rate cuts if demand remains resilient.
Business groups gave the data a cautious welcome. While the services-led expansion is encouraging, they noted that many firms continue to face high energy bills, labour shortages and uncertainty over future tax and regulatory changes. The artificial intelligence-driven component of growth is a positive signal for the UK's tech sector, but it also highlights how narrow the base of expansion has become.
The July GDP reading will feed directly into the Office for Budget Responsibility's forecasts ahead of the budget. A better-than-expected outturn for the month could marginally improve the fiscal outlook, though the chancellor is unlikely to revise his plans on the basis of one data point alone. The broader question is whether the UK can convert this surprise uptick into a sustained recovery as external risks intensify.