UK GDP Growth defies expectations in July but expected to slow ahead
Contrary to expectations, the UK economy grew by 0.4% in July (on a month-on-month basis) against a forecast of zero growth. Activity during the month was driven by services (0.4%), production (0.2%) and construction (0.1%). The sector breakdown shows that growth in the services sector was driven particularly by admin services, and computer programming and consulting with the statistics office noting that in the latter sector “many of the businesses reporting the largest turnover in July 2026 are involved in activities related to artificial intelligence and cloud computing”. Growth in AI may have outweighed the economic fallout from the Iran war but the UK economy still faces a number of headwinds.
For a more representative view of underlying trends in the economy, the 3 months to July (compared to the 3 months to April 2026) also showed an increase of 0.4% driven once again by service sector activity with construction and production showing modest declines (see Figure 1)
Figure 1: 3 months to July 2026 compared to 3 months to April 2026
Despite the better outcome in July, we still expect the economy to slow in the remainder of the year partly as a result of the potential fiscal tightening in PM Andy Burnham’s first Budget in October. The prospect of higher taxes and frozen tax thresholds could limit how much money regular households can spend while the 13% increase in the energy price cap that came into effect in July could also add fresh pressure to household budgets. The ongoing conflict in Iran has also pushed up energy costs, commodity prices and created supply chain hurdles.
There are 3 broad reasons to expect a slowdown this year. Every year since 2022, the UK economy has followed a familiar pattern of recording strong growth in H1 only to give way to softer activity in H2 (Figure 2). Part of this trend has been blamed on the seasonal adjustments applied by the UK statisticians. Some analysts have suggested that the statistical methods applied to raw data to remove seasonal factors (so as to provide a better guide to underlying growth trends) may not be working properly. The ONS, however, disputes this view. Signs of a slower economy are also evident in the labour market with employment falling (according to HMRC data), unemployment rising, businesses are cautious about adding new staff and private sector wage growth is slowing further.
Figure 2:
Growth in the UK economy has also been heavily concentrated in a number of sectors (as we see in today’s figures), largely IT, Transport and Storage as well as Health and Social Care with all three contributing a large share of growth despite making up a relatively small share of the economy. Moreover, the construction sector has been very weak with private housebuilding some 20% below pre-Covid levels, providing a neat encapsulation of how tight monetary policy is affecting an interest rate-sensitive sector.
On inflation, the BOE should take some comfort from recent CPI releases. While headline inflation increased to 2.9% in July that was not unexpected given the rise in household energy bills and also a bigger rise in social rents than this time last year. A further uptick in headline inflation is expected in the near term but underlying inflation will moderate in coming months as a cooling labour market leads to lower inflation in the service sector. We remain of the view that a soft economy and slowing inflation trends will stop the BOE from hiking (https://continuumeconomics.com/a/3a6553aa/boe-september-preview-no-2026-hike). Barring a sustained and material spike in energy prices as well significant surprises in the October budget, we think the BoE’s next move will be a cut in interest rates in 2027.