14 September 2026: UK’s GDP grows 0.4% in July, retail trade falls 0.5%

The economy grew in July, as the rapid expansion of AI appeared to outweigh continued economic damage from the Iran war.

Figures from the Office for National Statistics showed a surprise 0.4% increase in GDP, up from 0.3% in June. Many economists had forecast zero growth.

The figures suggested the economy remained robust despite the fallout from the Iran war, which has raised energy costs and led to higher borrowing costs than expected at the start of the year.

The ONS said the expansion in July was driven by 0.4% growth in the services sector, particularly in administrative services and computer programming and consulting. “Many of the businesses reporting the largest turnover in July 2026 are involved in activities related to artificial intelligence and cloud computing.”

PwC’s chief economist, Barret Kupelian, told the Financial Times: “Artificial intelligence continues to affect the UK economy, with AI-exposed sectors, professional services, information technology, and administrative services recording strong growth.”

The figures offer a boost to the Chancellor of the Exchequer ahead of his first budget on October 28, which risks being overshadowed by soaring government borrowing costs and surging oil prices, but may make some Bank of England officials more willing to consider a rate hike before the end of the year.

Much of the growth over the past three months appeared to come from computer programming businesses benefiting from the AI boom, said Liz McKeown, the ONS' director of economic statistics.

“In July, services also drove growth, with computer programming again making the largest contribution," she added, noting an extra boost for some firms from the World Cup and unusually hot weather.

Responding to the data, Healey said the economy was showing "welcome resilience", but that growth was "still fragile".

Sterling was little changed against the U.S. dollar after the data, and economists had mixed views on whether Britain's current economic outperformance would be sustained.

In the first half of 2026, Britain's economy expanded by 1%, the fastest growth across the G7 group of advanced economies, and some analysts believe this may in part reflect seasonal effects that have not been fully adjusted for.

"We're starting to reach the point in the year where we expect growth to peter out," said Matt Swannell, chief economic adviser to forecasters at ITEM Club. But others were more positive.

"The UK growth story is becoming harder to ignore," said Deutsche Bank Chief UK Economist Sanjay Raja. Forecasters were likely to revise up their expectations for full-year growth by 0.1% after the latest data, he added.

Financial markets are now pricing in up to 100 basis points of interest-rate increases over the next year, following stronger-than-expected growth and surging energy prices, which raise concerns about persistent inflation.

Money-market pricing suggests the Bank Rate could rise from its current 3.75% to around 4.75% by the beginning of H2 ‘27, equivalent to four quarter-point increases.

The stronger growth figures come as the Bank of England faces renewed inflationary pressure from sharply higher energy prices.

The pound was broadly stable last week, with a slight upward bias, trading in a tight range around the mid-1.35s against the dollar. Throughout the week, GBP/USD moved only modestly, reflecting a quiet macro backdrop early on and a dollar that stayed largely flat despite rising stress in equity markets.

The Federal Reserve now appears set to fight inflation with action, not words, as the latest data have pushed policymakers beyond the point where communication alone is credible. Across several Fed officials and market indicators, the message is consistent: inflation is too high, patience has run out, and a rate hike at this week’s meeting is now overwhelmingly anticipated.

Headline inflation is 3.4%, with core up 0.3% month-on-month, both above expectations. This suggests Core CPI and core PCE will remain well above the Fed’s 2% target, with price pressures broadening beyond energy.

Oil is now above $100/bbl, and Middle East conflicts are feeding inflation expectations. Energy-driven price shocks and tariff-related goods inflation are proving sticky.

This combination has removed the Fed’s ability to rely on forward guidance alone.

The internal tone has clearly turned hawkish. Kevin Warsh believes the Central Bank’s credibility is “on the line”, and markets expect him to pull the trigger on a hike this week. Meanwhile, Fed Governors Barr and Waller said that if inflation does not moderate, the Fed should “act decisively” and raise rates. Economists at several Wall Street institutions feel that the policy debate has shifted from “whether to hike” to “how much to hike.”

The rate-hike probability surged to 85–90% after the August CPI release. CBS told its viewers, “A Fed rate hike in September is all but guaranteed after the CPI report.” Futures markets now price a September hike as the base case, with a second hike in December increasingly feasible. This would be the first rate hike since 2023, ending a long pause. Markets are effectively forcing the Fed’s hand: failing to hike would damage credibility.

The Consumer Price Index report, released on Friday, showed that overall inflation remained elevated at an annual rate of 3.4%, following a 0.4% rise in July. “Core” inflation, which excludes volatile food and energy items, rose 0.3% in August, or 2.4% from a year earlier.

Rate-hike fever is spreading across the G7, but the Fed no longer sets the pace. This is a striking shift: for the first time in several years, other major Central Banks, particularly the ECB, are turning hawkish faster than the Federal Reserve, and markets are reacting accordingly.

On either side of this week’s FOMC meeting, a slew of data is due for publication, including retail sales and the Philly Fed Manufacturing index.

The USD was essentially flat last week, masking real turbulence beneath the surface. The dollar index opened just below 99, dipped briefly towards key support at 98.66, and closed the week almost exactly where it started, at 99.12, a round-trip that concealed the impact of a major yen-driven carry unwind and rising global rate-hike expectations.

French Central Bank Governor Emmanuel Moulin told reporters on Friday that France was not in catastrophic economic danger, but the Government must act to reduce the country’s public deficit.

Moulin spoke after INSEE revised its economic forecast lower on Thursday, predicting growth of just 0.4 percent this year.

He cited several factors, including a deadly heatwave and issues at Airbus.

France’s national statistics institute had previously forecast 0.7% growth for 2026, down from last year’s 0.9% expansion. “I wouldn’t say the economy is in danger, but it is in a situation that’s worrisome and unsatisfactory,” Moulin told RTL radio.

Within a few months, France's growth forecast has been revised downward three times, ultimately to half its original level. On Friday, the government lowered its 2026 projection to 0.5%, down from 1% at the start of the year. The previous day, the national statistics office INSEE published an even more pessimistic analysis, forecasting GDP growth of just 0.4%, far below that of other major eurozone economies. France is not only slowing down: it is at risk of falling behind.

Most worrying is that the decline cannot be blamed entirely on external circumstances. War in the Middle East, higher energy prices, geopolitical uncertainty, and high interest rates: all of Europe's major economies are facing these challenges. Except Spain, none are thriving, but they are all weathering the storm, even if only modestly. France, however, is stalling. The country also suffers from specific weaknesses that the deteriorating economic climate is only worsening.

The heatwave affected agriculture, public works suffered following the municipal elections, and the labour market is weakening. But such short-term factors should not obscure a deeper weakness: the engines of growth are losing steam. Purchasing power is declining, consumption is stagnating, and business investment has once again begun to fall.

Euro-area inflation will remain elevated for some time, according to European Central Bank President Christine Lagarde. “The current shock is longer-lasting,” she told Ouest-France in an interview, “while conflict in the Middle East is continuing. We expect volatility and pressure on energy prices to persist, even though rising prices also pose a risk to growth.”

The ECB raised interest rates this week for the second time since the Iran war sent oil and gas prices soaring.

Officials expect rates to rise further to bring inflation, currently above 3%, back to 2%, Bloomberg reported last week.

“There has been a major shock that will probably last longer than we had expected,” Lagarde said, according to the transcript of the interview published on the ECB’s website at the weekend.

Eurozone governments are preparing for one of the biggest leadership reshuffles in the European Central Bank’s 28-year history, with a “grand package” covering its three top roles expected to be agreed by the end of December, according to people familiar with the matter.

The leadership overhaul will be necessary because ECB president Christine Lagarde is expected to announce later this year that she will leave the ECB by early 2027, ahead of the next French presidential election. The eight-year terms of chief economist Philip Lane and executive board member Isabel Schnabel will also expire next year.

The “aim is to have a grand package agreed by the end of the year”, one EU diplomat told the FT.

Lagarde entered France’s Presidential Election fray at a political gathering on Saturday, as speculation grows that she’ll leave the European Central Bank early.

Her speech in rural Normandy took her far from the technicalities of setting interest rates. “Here at the Fête de la Pomme, we celebrate something distinctly Norman,” Lagarde said. “Europe has helped that regional identity become a greater source of prosperity, opening markets while protecting what makes local products distinctive.”

The annual event, hosted by the region’s president, Hervé Morin, has more to do with politics than apples. Past editions have featured conservative presidential hopefuls, including Bruno Retailleau, who wants to appear on next year’s ballot.

“European integration helps turn regional strengths, old and new, into global strengths,” Lagarde commented. “Our task is to build on that achievement. By bringing more of our strengths together, we can give businesses greater scope to invest and households greater security in a more uncertain world.”

The Euro was mildly stronger last week, gaining around 0.25% against the dollar, with most of the movement driven by shifting expectations around the ECB’s rate decision and the Fed’s September CPI.

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