Economists warn UK growth spurt will be erased by rising borrowing costs

The United Kingdom’s unexpected economic expansion in July is expected to be reversed by a sharp rise in energy prices and increased borrowing costs, according to warnings issued to the government. Fresh data released on Friday indicated that the economy grew by 0.4 per cent during the month, a figure that exceeded initial forecasts of flat growth. However, economists caution that ongoing fiscal pressures, exacerbated by the conflict between the United States and Iran, will continue to strain public finances ahead of the upcoming Budget.

Julian Jessop, an economics fellow at the Institute for Economic Affairs, described the recent performance as a temporary reprieve. He noted that while the economy held up better than anticipated in July, this may represent the calm before a significant downturn. Jessop argued that positive developments from the previous two months are being undermined by new headwinds from energy markets and bond yields. He characterised the current economic situation as one where the nation is moving from one crisis to the next without sustained stability.

A substantial portion of July’s unexpected boost was attributed to a strong period for artificial intelligence and cloud computing firms, which saw a surge in revenue. Yael Selfin, chief economist at KPMG, stated that while this sectoral growth provides some support for public finances, it is unlikely to significantly increase the Chancellor’s room for manoeuvre. With borrowing costs remaining elevated and competing spending pressures significant, Selfin suggested that difficult decisions regarding tax and expenditure are unavoidable for John Healey as he prepares his first Budget.

Some economists have predicted that the £22 billion in fiscal headroom left by the previous administration in the 2025 Budget could be halved following a recent sell-off in government bonds. Analysts warn that Healey has limited capacity for further borrowing and may be forced to increase taxes to comply with fiscal rules, which require day-to-day spending to match receipts by 2030. Richard Carter, head of fixed interest research at Quilter Cheviot, noted that growth may be difficult to sustain and that economic activity is likely to stall before the Budget. He added that calls for pro-growth measures will intensify, though the government’s ability to act remains uncertain if more tax levers are pulled.

In his first major speech as Chancellor earlier this week, Healey stated he would not speculate on tax questions. Responding to the GDP figures, he said Britain’s economy is demonstrating welcome resilience despite global uncertainty. He acknowledged that while growth was the fastest in the G7 in the first half of the year, the conflict in the Middle East is impacting domestic costs, from household shopping to government borrowing.