UK growth beats forecasts but war and tax clouds loom

Torsten Bell, the pensions minister, praised the latest data that showed the UK economy expanded by 0.4 percent in the second quarter, lifting first‑half growth to about one percent, the fastest rate among the G7. The Office for National Statistics released the figures on Thursday, and even former chancellor Rachel Reeves took the opportunity to note that the performance was “not inevitable”.

Growth data beats expectations

Analysts at KPMG and Berenberg had warned that annual growth would stay below one percent, so the half‑year result is a pleasant surprise. Business investment rose 1.7 percent in the latest quarter, largely driven by the technology segment of services. Some observers link the surge to a wave of AI projects across professional‑services firms.

“The boost to growth figures was temporary,” said Thomas Pugh, an economist at RSM.

However, the optimism is tempered by mixed signals from other parts of the economy. Production in electricity, gas, steam and air‑conditioning remained flat, keeping manufacturing output subdued. Construction activity is still about two percent below the same period last year.

Underlying weaknesses

Energy constraints are a key worry. The IMF chief Kristalina Georgieva and Bank of England deputy governor Sarah Breeden have warned that over‑reliance on speculative tech spending could backfire if energy supplies stay tight. S&P Global’s purchasing managers’ index points to growth of just 0.1 percent on a three‑month basis, far lower than the 0.4‑percent quarterly print.

Analysts at RB Capital Markets say the ONS estimate has become “much more volatile”, especially after a downward revision of May’s figure. Seasonal factors also played a role, a run in the World Cup and unusually sunny weather lifted consumer spending, according to George Brown of Schroders, who called the effect a “seasonal quirk”.

Looking ahead to the budget and geopolitics

The next six months will test whether the current pace can be sustained. Two events dominate the outlook: the resolution of trade talks in the Middle East and the upcoming budget from John Healey, the chancellor‑in‑waiting. Disruption in the Strait of Hormuz could choke off a fifth of global oil and gas supplies, prompting the Bank of England to consider further rate hikes.

Forecasts from Capital Economics suggest that if the Strait remains blocked, GDP could stall at 0.3 percent in 2027 and inflation could peak at 4.3 percent. The budget, therefore, is expected to focus on “resilience”, with tax rises and spending cuts potentially adding £25 billion by 2030, according to Treasury advisers.

Critics warn that pre‑budget speculation may dampen consumer confidence, as noted by former BoE chief economist Andy Haldane. Yael Selfin of KPMG cautioned that nervousness ahead of the budget could curb spending while slower wage growth squeezes household budgets.

Investors will be watching how the government balances fiscal support for energy costs with the need to fund defence and cost‑of‑living measures. The outcome will shape whether the modest growth seen so far can be turned into a sustained recovery.

For businesses seeking to ride the tech wave, initiatives such as the Alibaba competition for UK SMEs may provide additional capital, but broader macro‑economic stability remains the decisive factor.