By David Milliken
LONDON, Sept 11 (Reuters) – Britain’s economy grew at the fastest annual pace in 18 months in July, helped by a boost from artificial intelligence and extending a strong first-half performance despite headwinds from the U.S.-Iran war, official figures showed on Friday.
The figures offer a boost to new finance minister John Healey ahead of his first budget on October 28 – which risks being overshadowed by soaring government borrowing costs and surging oil prices – and may make some Bank of England officials more willing to consider a rate hike before the end of the year.
British gross domestic product in July was 1.6% higher than a year earlier, the fastest annual growth since February 2025 and above economists’ 1.2% forecast, the Office for National Statistics showed on Friday.
The economy grew 0.4% on the month in July, compared with median expectations in a Reuters poll for unchanged output, and growth in the three months to July – which smooths volatility – was also stronger than expected at 0.4%.
“The UK economy has performed much better than expected amid the fallout of the Iran war,” said James Smith, developed markets economist at ING, noting that inflation had risen less steeply than first predicted.
BUSINESSES BENEFITING FROM AI HELP LIFT GROWTH
Much of the growth over the past three months appeared to come from businesses involved in computer programming that were benefiting from the AI boom, the ONS’ director of economic statistics, Liz McKeown, said.
“Looking at the latest month, services also drove growth in July, with computer programming again making the largest contribution,” she added, noting an extra boost for some firms from the men’s soccer World Cup and unusually hot weather.
Responding to the data, Healey said the economy was showing “welcome resilience” but that growth was “still fragile”.
Sterling was little changed against the U.S. dollar after the data and economists had mixed views about whether Britain’s current economic outperformance would be sustained.
In the first half of 2026, Britain’s economy expanded by 1%, the fastest growth across the Group of Seven large advanced economies, and some analysts believe this may in part reflect seasonal effects that have not been fully adjusted for.
“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.
But others were more positive.
“The UK growth story is becoming harder to ignore,” said Deutsche Bank Chief UK Economist Sanjay Raja. Forecasters were likely to revise up their expectations for full-year growth by 0.1 percentage points after the latest data, he added.
Many economists think British productivity growth – a key driver of longer-term economic performance and living standards – is beginning to recover after a 20-year decline though it remains early days and there is no clear consensus on the cause.
SHADOW OF IRAN WAR
In July, the Bank of England predicted the economy would expand 1.1% over 2026 as a whole, and this week Governor Andrew Bailey told a parliament committee that economic data since then had come in “a bit stronger” than he had expected.
Measures of consumer confidence and business activity also strengthened over the summer after Prime Minister Andy Burnham took over from his Labour predecessor Keir Starmer.
Britain, like other European economies, has taken less of an immediate hit to growth from the U.S.-Israeli war on Iran than economists had feared at the outset.
But the conflict this week pushed oil prices above $105 a barrel with knock-on impacts on government borrowing costs, which are now at multi-decade highs, and the BoE expects inflation to rise to around 3.2% later this year.
Almost all economists polled by Reuters expect the BoE to keep interest rates on hold next week and for the rest of this year, but financial markets think it is near certain that rates will rise by November due to stronger inflation pressures.
(Reporting by David Milliken and Andy Bruce; Editing by William James, Kate Mayberry and Alison Williams)
Comments