UK economy sees surprise growth in July helped by AI boom

The UK's economy grew faster than expected in July partly helped by businesses using artificial intelligence (AI).

The economy expanded by 0.4%, the Office for National Statistics (ONS) said, whereas analysts had predicted no growth.

Growth in July was helped by a strong performance from the services sector, and particularly computer programming.

Experts said the figure showed the UK economy was proving resilient in the face of shocks such as the war in Iran, but they expect growth to slow in the months ahead as high energy prices affect households.

July's figure follows growth of 0.3% in June and zero growth in May.

According to the ONS director of economic statistics, Liz McKeown, there was evidence that businesses involved with AI and related technologies helped to boost the sector, not just in July but in May and June as well.

The ONS said many of the IT businesses reporting the largest turnover "appear to be involved with AI", though it said it is difficult to quantify the exact impact of AI.

McKeown also said some businesses had said that the warm weather and football world cup had affected activity in July, although she said the effects "differed across industries, benefitting some businesses while creating challenges for others".

The ONS said that in the three months to July, which gives a better underlying picture, the economy grew by 0.4% compared with the previous three months.

Rob Arnold, co-founder of Ascendea, an AI firm which employs nine people, believes the UK hasn't seen the real economic growth potential from the technology yet.

He says his company is able to develop apps for other businesses "100 times quicker at a 50th of the cost" because of AI, but that the UK government needs to do more to invest in the sector as there are currently better opportunities in the US.

He knows a few small UK-based AI firms that have either moved to the US or are thinking of doing so due to a lack of UK government support.

Alongside grants and funding, he says the government also needs to invest in training companies on how to use AI as it can be dangerous if not understood properly. "It's like playing with a weapon," he says.

Paul Dales, the chief UK economist at Capital Economics, said July's data showed "the resilience of the economy in the first half of the year continued into the second half".

However, he added that higher energy prices and borrowing costs would soon start to hit growth, especially if the rises seen this week are sustained.

The Iran war has led to a sharp jump in oil prices, which has fed through to higher energy and fuel prices - affecting households and businesses.

This rise in energy costs has led to fears that inflation will remain high, and increase the chance that central banks will hike interest rates to keep price rises under control.

The Bank of England is meeting next week to discuss interest rates. Economists widely expect rates to be held, but some have predicted an increase before the end of the year.

Chancellor John Healey said the economy, was "demonstrating a welcome resilience, despite serious global uncertainty".

"Our growth although still fragile was the fastest in the G7 in the first half of the year," he added.

"But, the conflict in the Middle East does have impacts here at home - from the cost of the weekly family shop to the cost of government borrowing."

Healey is to present his first Budget in October. He told BBC News this week that he wants people to confident about the economy , despite acknowledging the challenge of "historic high" borrowing costs.

Shadow chancellor Andrew Griffith said nobody in the government "should be high-fiving themselves" over the latest figures.

"Our construction and production sectors are shrinking, unemployment is up under Labour, and we've got the highest government borrowing rates in almost 30 years."

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Yael Selfin, chief economist at KPMG, said while July's headline growth figure was strong, it "masks a weaker picture for households".

"Consumer-facing services contracted in July, as retail and hospitality activity fell following earlier increases in activity in the summer," she said.

"Higher 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."

Richard Carter, the head of fixed interest research at investment firm Quilter Cheviot, said the growth seem in July "may not last, especially as activity is likely to stall ahead of the Budget.

"The war in the Middle East continues to drive a lot of the economic data, but the UK is the most exposed to the fallout," he said.

"Calls for pro-growth measures will get louder as the Budget nears, but whether or not the government has the room to act remains to be seen."