UK economy beats forecasts with 0.4% growth in July as tech boom offsets household squeeze

What drove the UK's surprise economic growth?

The UK economy grew by a surprising 0.4% in July, brushing off predictions of stagnation as businesses investing in artificial intelligence helped drive a strong month for the services sector.

Figures released by the Office for National Statistics (ONS) showed that the expansion accelerated from the 0.3% growth recorded in June. Most City analysts had expected the economy to remain entirely flat, following a summer of high interest rates and global energy shocks. On an annual basis, GDP was 1.6% higher than in July last year.

Much of the momentum came from computer programming and IT. Liz McKeown, the director of economic statistics at the ONS, said there was clear evidence that companies involved with AI and related technologies had boosted the sector, a trend that also helped prop up growth in May and June.

Why are households still feeling the squeeze?

Yet beneath the headline expansion, the picture for ordinary households looks far more fragile. Consumer-facing services, including retail and hospitality, actually shrank in July. Economists warned that the recent spike in global oil prices, triggered by the war in Iran, will soon feed into higher household utility bills and keep pressure on the Bank of England to maintain high interest rates.

Yael Selfin, chief economist at KPMG, noted that high energy and fuel prices are likely to place further pressure on household budgets, while elevated mortgage rates will continue to weigh on housing activity and wider consumer spending.

The resilience of the economy was welcomed by Chancellor John Healey, who noted that UK growth was the fastest in the G7 in the first half of the year. However, he acknowledged that the recovery remains fragile ahead of his first Budget in October. Shadow chancellor Andrew Griffith argued against complacency, pointing out that both the construction and production sectors had contracted over the longer three-month period to July.

How is the AI boom impacting water supplies?

The rapid growth of the tech sector is also beginning to clash with the reality of the UK's strained infrastructure. Ministers are currently examining plans to hike water rates for major industrial users, including the highly water-hungry datacentres needed to run AI systems.

With nearly three-quarters of England in drought after a dry summer, the Environment Agency has warned that England faces a water deficit of five billion litres a day by 2055. Helen Wakeham, the agency's director of water, said big industrial customers currently pay less per litre the more they use, meaning water is treated as a cheap, disposable resource.

Datacentres in England currently consume about 6.6 million litres of drinking-quality water every day just to keep their cooling systems running. With the government aiming to triple UK datacentre capacity by 2030, that figure could rise to nearly 20 million litres a day, prompting the Environment Agency to work with ministers on a complete overhaul of how water is priced for heavy industry.