UK GDP: Is the UK economy getting an AI boost? GDP again surprises on the upside

Underneath recent upside surprises to UK GDP growth there is a growing sense that the UK economy is getting a boost from AI, challenging the underlying, often downbeat, narrative about the UK economy. High oil prices remain a challenge, and this does not look like an economy firing on all cylinders, but the economy is proving more resilient than expected.

After a reasonably strong first half of the year, and after stronger than expected growth of 0.4% month-on-month in July, GDP has now risen 0.1% month-on-month in August – again stronger than expected (consensus.: -0.1% month-on-month). Smoothing out over the monthly ups and downs, rolling 3M/3M growth rose from an upwardly revised 0.5% to 0.7%.

The month-on-month figures are volatile and slower growth in August compared to July could be seen as payback for stronger earlier figures. In our view, underlying GDP growth is likely running somewhere in between recent month-on-month outturns. PMI business surveys had pointed towards modest positive growth in August.

If output was flat in September, Q3 GDP growth would be on track to record a relatively strong 0.7% quarter-on-quarter in Q3, which would be significantly more than the Bank of England (BoE) staff forecast from their last policy meeting (0.4% quarter-on-quarter).

Breaking down the August figures

In the August release there were again some signs of an AI-related boost playing a role in more resilient than expected GDP growth.

• Services output was flat (0.0% month-on-month), a touch stronger than expected with growth led by wholesale/retail and “professional, scientific and technical activities.” On the former, according to the ONS, “The main contributor to monthly growth was wholesale of information and communication equipment.”
• Production output rose 0.8% month-on-month, much stronger than expected
• Construction output fell 0.2% month-on-month, a bit weaker than expected

Looking at the last three months, compared to the same period a year ago (where overall GDP growth has been a robust 1.8%), the sectors with the largest positive contributions to growth are professional, scientific and technical activities’ and “information and communication”. Within those sectors, the largest positive contribution to GDP growth has been from “computer programming, consultancy and related activities” (contributing 0.32pp).

Challenging the pessimism

It will be interesting to see whether the ongoing run of stronger than expected GDP growth starts to shift views on underlying growth in the UK economy. The surprises are feeling less like a succession of one-offs and more of a coherent story where the UK is getting a bit of a boost from AI-related activity.

BoE’s focus likely elsewhere

We think the BoE’s focus will remain on inflation-related indicators themselves and, second to that, what is happening to the labour market backdrop (and any implications for pay growth). We already expect the BoE to hike rates in November. However, against a backdrop of elevated inflation, resilient GDP growth at the margin further adds to the likelihood of a rate hike at their November meeting. Robust GDP growth leans against the MPC’s judgement that weakness in economic activity (and soft labour market conditions) will help to contain inflation.

Fiscal help?

Stronger economic growth, to the extent that it feeds through into stronger tax revenues, is clearly helpful for fiscal policy too, although the general backdrop (higher inflation, higher bond yields) is expected to have reduced, rather than increased, Chancellor John Healey’s fiscal headroom in this forecast round.

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