UK GDP: Still surprisingly strong, some AI support?

After a reasonably strong start to the year, GDP rose 0.4% month-on-month in July, much stronger than expected (consenus: 0.0% month-on-month). Rolling 3M/3M growth also rose a touch from 0.3% to 0.4%.

If output was to be flat in August and September, Q3 GDP growth would be on track to rise to an impressive 0.6% quarter-on-quarter in Q3, which is much stronger than the Bank of England (BoE) had forecast back in July.

The report notes that warm weather in July was cited by some businesses as supporting activity growth but cited as having a negative impact by businesses in the construction sector. The World Cup also may have had a positive impact, particular within pubs, clubs and advertising.

Looking into the details, the strength in July was largely driven by the services and manufacturing sectors, which seem to be being somewhat supported by AI-related activity. Both production as a whole and construction output also increased on a month-on-month basis:

• Services output grew 0.4% month-on-month in July. The largest contribution came from administrative and support services, but information and communication also contributed. Computer programming, consultancy and related services grew 3.5% month-on-month in July, tentatively pointing to a bit of a boost from AI. The release notes that “many of the businesses of the businesses reporting the largest turnover in July 2026 are involved in activity related to artificial intelligence and cloud computing”
• Production output rose 0.2% month-on-month in July, reversing a 0.2% month-on-month fall in June. Notably, manufacturing output rose 0.9% month-on-month in July, with the largest contribution coming from computer, electronic and optical products, although that could reflect a bounce back after falling 0.9% month-on-month in June.
• Construction output grew 0.1% month-on-month in July, supported by repair and maintenance while new work fell. 

The surprises are starting to feel less like a succession of one-offs, and follow more of a coherent narrative where the UK is getting a bit of a boost from AI-related activity.

Implications for monetary policy

It will be interesting to see whether recent stronger-than-expected GDP growth starts to shift BoE views on underlying growth in the UK economy. This story still feels too tentative and early to put a lot of weight on, but the surprises are starting to feel less like a succession of one-offs, and follow more of a coherent narrative where the UK is getting a bit of a boost from AI-related activity. Overall, with the labour market having slowed so significantly and tentative signs of improvement in productivity growth, we think the BoE’s focus will be on inflation-related indicators themselves, rather than immediately worry that stronger growth will bring a tighter labour market and stronger pay growth. Still, at the margin, with oil and gas prices surging once again, and the possibility of further inflationary pressures later in the year coming from food prices, this release adds to the growing probability of a rate hike from the BoE this year.

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