Economy shows surprise AI-led growth but energy squeeze looms

The UK economy recorded 0.4% growth in July, partly on the back of artificial intelligence (AI) investment, according to early official figures that outperformed expectations.

The Office for National Statistics (ONS) said output accelerated - on the back of 0.3% growth the previous month - as the services sector was also boosted by bars and food sales which benefited from good weather during the World Cup.

Economists had widely expected zero growth to be recorded in July.

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ONS director of economic statistics, Liz McKeown, said: "Within services, computer programming was the largest contributor, continuing the strong growth seen throughout the year, with evidence that businesses involved with AI and related technologies helped to boost this sector.

"Continuing recent trends, research and development and rental and leasing also helped drive growth, while wholesaling saw a notable fall."

AI investment, led by data centre spending and increased AI use among firms, has propped up growth since the spring as the economy has increasingly grappled with the effects of the conflict in the Middle East.

Those effects have intensified markedly this week.

Oil prices are set to end this week above $100 a barrel for the first time since mid-May while wholesale natural gas costs are at levels not seen for four years.

The supply squeeze caused by the war is front and centre of financial market attention and the implications for the months ahead are a cause of great concern.

The energy price-driven cost of living crisis that followed Russia's invasion of Ukraine is fresh in the mind and a hangover has always remained.

Like in 2022, gas is the main cause for concern, as it is the main driver of the energy price cap due to its importance in creating power and heating homes.

Rising oil prices are already being seen at the fuel pumps and for home heating.

The fear will be that higher energy prices become ingrained in the economy, with manufacturers and service providers passing them on down supply chains to already-squeezed consumers.

Hikes to inflation - and therefore interest rate rise expectations - are already hurting government borrowing costs and the cost of servicing existing debt.

A 30-year bond sale this week saw the highest yield paid since 1998.

It all threatens the chancellor John Healey's wriggle room heading into next month's budget, though he pointed, in a speech this week, to an "optimistic story" for a UK economy that was "turning a corner".

Felix Feather, economist at wealth manager Aberdeen, said of the ONS figures: "Economic activity has held up surprisingly well against the effects of the energy cost shock so far, with the data persistently outperforming expectations.

"These figures will go some way to reassuring Bank of England policymakers that the current level of rates is not meaningfully restricting growth, which in turn suggests that rates could be moved higher without causing undue economic scarring.

"We therefore expect the Bank to move to contain high inflation with a 25 basis point hike in November after holding next week."

(c) Sky News 2026: Economy shows surprise AI-led growth but energy squeeze looms