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Economic growth in July rose 0.4% as the AI sector accelerated the UK GDP, providing relief for Chancellor John Healey amid rising oil prices and borrowing costs. The IT and computer programming sectors led the expansion, boosting investor confidence before the October budget and while the pound steadied against the dollar. The Bank of England forecasts continued growth, though higher energy prices may soon dampen activity.
The economy’s stronger than expected start to the third quarter offers some relief for chancellor John Healey, who is facing a surge in oil prices and a rise in borrowing costs ahead of his first budget on October 28.
Photograph: Leon Neal/Getty Imageseconomy grew 0.4 per cent in July as the global AI boom helped deliver an unexpectedly resilient start to the third quarter, in a boost to Prime MinisterFriday’s figure from the Office for National Statistics was far above the zero growth forecast by analysts polled by Reuters and marked an acceleration from the 0.3 per cent expansion in June. Liz McKeown, director of economic statistics at the ONS, said the IT sector was the biggest contributor within the services sector in the three months to July, adding that there was “evidence that businesses involved with AI and related technologies helped to boost this sector”.
State wants us to be tech-savvy, but the problem is we do not trust technologyWestport Estate’s CEO on its two-year closure: ‘There’s a lot of money being spent here’ According to the ONS, economic output from computer programming and consultancy grew 4.4 per cent in the three months to July. In the three-month period, a less volatile measure, the economy as a whole grew 0.4 per cent, matching the pace of the second quarter but down from a 0.6 per cent expansion in the first.
Martin Beck, chief economist at consultancy WPI Strategy, said the contribution from the IT sector suggested that spending on AI was becoming an increasingly important driver of investment into the economy.
“At a time when many traditional parts of the economy remain subdued, this is exactly the kind of productivity-enhancing spending the UK needs more of,” he noted. The pound was steady against the dollar at $1.351 following the release of the July GDP data, while gilts steadied after a sharp sell-off on Thursday.
The economy’s stronger than expected start to the third quarter offers some relief for chancellor John Healey, who is facing a surge in oil prices and a rise in borrowing costs ahead of his first budget on October 28. In its most recent forecast at the end of July, the Bank of England expected the economy to grow just 0.1 per cent in the third quarter.
Economists said that the strong expansion in July meant that third-quarter growth was likely to top that forecast. But despite the boost to the economy from AI spending, households and businesses are contending with a sharp rebound in oil prices following the escalation of hostilities in the Middle East. Oil prices surged to as high as $109 a barrel this week, prompting traders to bet on a more aggressive pace of rate rises from the BoE to curb inflation.
According to levels implied by swaps markets, traders anticipate four quarter-point rate increases over the next year, compared with an expectation of two at the start of the week. Paul Dales, an economist at Capital Economics, said the economy’s resilience so far this year had continued into the second half. But he warned that “higher energy prices and borrowing costs will soon take a bigger toll on real activity, especially if this week’s big leaps are sustained”.
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