UK economy accelerates in July as AI and World Cup lift services sector

The UK economy expanded faster than expected in July, with gross domestic product (GDP) rising 0.4% on the previous month, according to figures released by the Office for National Statistics (ONS). The growth, which follows a 0.3% increase in June, comes as Chancellor John Healey prepares his first budget next month, with borrowing costs and inflationary pressures still looming over the recovery.

The services sector, which accounts for nearly 80% of the UK economy, was the primary driver of the uptick. Within it, computer programming saw particularly strong growth, with the ONS attributing the rise to "businesses involved with AI and related technologies." The surge in tech activity coincided with a broader boom in digital services, as companies continued to invest in automation, cloud computing, and data analytics to offset labour shortages and rising operational costs.

The timing of the Men’s World Cup also played a role, the ONS noted. England’s unexpected run to the third-fourth playoff in the tournament, held in the Middle East, contributed to a rise in hospitality and retail activity, as fans gathered in pubs and restaurants to watch matches. The heatwave that gripped much of the UK in July further bolstered spending, with consumers flocking to outdoor venues and leisure activities.

Despite the positive headline figure, the ONS warned that the underlying picture was more nuanced. While services grew by 0.5% in July, production fell by 0.2% and construction by 0.1%, suggesting that the recovery remains uneven. The data also revealed that the UK’s trade deficit widened in July, as imports outpaced exports, a trend that could weigh on growth in the coming months.

AI’s growing footprint in the UK economy

The ONS’s emphasis on the role of AI in driving July’s growth highlights a broader shift in the UK’s economic landscape. The computer programming sector, which includes software development, data processing, and AI-related services, has been a consistent outperformer in recent months, reflecting the country’s push to position itself as a global leader in artificial intelligence.

The government has actively courted investment in the sector, with initiatives such as the £1bn AI Sector Deal and the establishment of the Office for Artificial Intelligence in 2018. These efforts have borne fruit, with the UK now home to more than 3,000 AI startups, according to industry estimates, and London ranking as the top European city for AI investment.

However, the rapid growth of the sector has also raised concerns about its sustainability. Critics argue that the UK’s AI boom is overly reliant on a handful of high-profile companies and that the benefits are not being evenly distributed across the economy. There are also fears that the sector’s expansion could exacerbate existing inequalities, particularly in regions outside London and the Southeast, where tech clusters are less developed.

The ONS’s data suggests that the AI-driven growth in July was concentrated in a few key areas, including fintech, healthtech, and enterprise software. While these industries have the potential to drive long-term productivity gains, their immediate impact on employment remains limited. The tech sector has been a net creator of jobs in recent years, but many of these roles are highly specialised and require advanced skills, leaving lower-skilled workers at risk of being left behind.

Grid delays and climate risks threaten long-term growth

While July’s GDP figures offer a welcome respite from the economic gloom of recent months, two looming challenges threaten to undermine the UK’s recovery: delays in upgrading the electricity grid and the growing impact of climate change.

The National Audit Office (NAO) issued a stark warning this week about the "great grid upgrade," the £70bn programme to modernise the UK’s electricity transmission network. The project, which is critical to meeting the country’s net-zero targets by 2030, is already running over budget and behind schedule, according to the watchdog. The NAO called for greater transparency from the Department for Energy Security and Net Zero (Desnz) about the risks to consumers, who could face higher energy bills if the programme’s costs spiral further.

The delays in the grid upgrade are particularly concerning given the UK’s reliance on renewable energy. The country has made significant progress in expanding its wind and solar capacity in recent years, but the existing grid infrastructure is struggling to keep pace. Without urgent investment, the UK risks missing its 2030 targets, which could have knock-on effects for both the economy and the environment.

Meanwhile, the economic toll of climate change is becoming increasingly apparent. The wildfires that swept through parts of the UK in August, including the blaze in Stourbridge that destroyed the home of Sandy and Uttam Shiralkar, serve as a stark reminder of the risks posed by rising temperatures. The Shiralkars, who lost everything in the fire, told the BBC that they could no longer show their grandson photos of his father, as all their family memories had been reduced to ashes.

The economic impact of such events is difficult to quantify, but insurers have warned that the cost of climate-related disasters is rising sharply. The Association of British Insurers (ABI) estimates that the UK could face annual losses of £1bn from wildfires, floods, and storms by 2050 if current trends continue. These costs will ultimately be borne by consumers, businesses, and the government, further straining an already fragile economic recovery.

What the numbers mean for Healey’s budget

For Chancellor John Healey, the July GDP figures provide a much-needed boost ahead of his first budget next month. The stronger-than-expected growth will ease some of the pressure on the government to introduce immediate stimulus measures, but it also underscores the need for a long-term strategy to address the UK’s structural challenges.

Healey has already signalled his intention to focus on boosting productivity, investing in green infrastructure, and supporting industries that can drive sustainable growth. The AI sector, which contributed significantly to July’s growth, is likely to feature prominently in his plans, as is the need to accelerate the grid upgrade to ensure the UK remains on track to meet its net-zero targets.

However, the chancellor will also need to address the uneven nature of the recovery. While the services sector continues to perform well, production and construction remain weak, and the trade deficit is widening. The government’s migration reforms, which have sparked backlash from businesses over labour shortages, could further complicate the picture, particularly in sectors such as social care and hospitality that rely heavily on foreign workers.

The July GDP figures are a reminder that the UK economy is at a crossroads. The AI-driven growth in the services sector offers a glimpse of the potential benefits of technological innovation, but the delays in the grid upgrade and the growing impact of climate change highlight the risks that lie ahead. For Healey, the challenge will be to strike a balance between supporting short-term growth and laying the foundations for a more resilient and sustainable economy.