UK economy unexpectedly grew 0.4% in July boosted by AI surge

UK GDP grew 0.4% in July (from 0.3% in June), beating the Reuters consensus of zero. Services +0.4%; ONS said IT was the biggest contributor in the three months to July, with evidence AI-related businesses boosted output. Computer programming and consultancy output +4.4% in the three months to July; computer/electronics production also supported manufacturing. Three-month GDP +0.4% (match Q2, below Q1’s 0.6%); strong July start suggests Q3 could beat the BoE’s 0.1% forecast. Martin Beck called AI spending an increasingly important, productivity-enhancing investment driver while traditional sectors stay subdued. Caveats: 10-year gilt yield still near post-2007 highs (5.37% after a 1bp slip); oil at $109 amid Middle East hostilities; Bailey flagged upside inflation risks; swaps imply four quarter-point BoE hikes over the next year vs two earlier in the week; five-year mortgage rate 5.72% (highest since April). Capital Economics’ Paul Dales warns higher energy and borrowing costs will soon hit activity; consumer-facing services fell 0.4% (retail-led). Result may help OBR forecasts before the Oct 28 Budget, but yields threaten to halve John Healey’s budget buffer from >£23bn in March.