AI investment helps deliver strong July GDP growth 

The UK economy grew by 0.4% in July, up from 0.3% in June. This increase largely reflected a 0.4% jump in service sector output with administrative services, and computer programming and consulting doing particularly well. 

Computer programming, consultancy and related activities grew by 3.5% in July (see Chart 1), with many firms reporting the strongest turnover growth involved in artificial intelligence and cloud computing. 

Outside of the service sector, industrial production output grew by 0.2%, and construction grew by 0.1%. July's strong performance is likely to represent the high-water mark for economic growth in Q3, with higher energy bills and pre-Budget tax uncertainty expected to weigh on household spending and economic activity through August and September.

UK labour market weakens further

The number of employees on company payrolls fell by 26,000 in August – a decrease of 145,000 compared with August 2025. Total job vacancies, a good indicator of demand for labour, fell by 8,000 to 702,000 in the three months to August 2026. This is 16,000 lower than at the start of the year. 

UK regular pay growth (excluding bonuses) was unchanged at 3.5% in the three months to July 2026. Private sector pay growth eased to 2.9%, while public sector pay grew by 6.3% (see Chart 3), partly reflecting the NHS pay awards this year.

The UK labour market could be heading for a rockier autumn, as rising energy bills and pre-budget tax uncertainty increasingly curb hiring intentions, resulting in moderately higher unemployment and lower pay growth.

November rate rise shifts from ‘possible to probable’

The Bank of England kept interest rates on hold at 3.75% in September. The Monetary Policy Committee voted 6-3 in favour of this decision, with the three dissenting members voting for a 0.25% rate rise. 

While the vote split was unchanged, the tone of the meeting minutes points to a hardening sentiment within the committee amid mounting inflation concerns. This keeps the door wide open to a November rate rise. With continuing US-Iran hostilities and inflation concerns mounting, the likelihood of a further rate increase has shifted from possible to probable.

The Bank of England also decided to effectively pause government bond sales, known as Quantitative Tightening . The decision should help ease some of the pressure on the government from the UK bond market in the lead up to October’s budget.

Uncertainty and energy costs most common challenge impacting turnover

Official data revealed that economic uncertainty remained the most commonly reported challenge affecting turnover among trading businesses in early September 2026 (cited by 29% of respondents). This was broadly unchanged from August 2026 and September 2025.

For businesses with 10 or more employees, labour costs remained the most frequently cited challenge, reported by 37% of firms and broadly unchanged over the same periods.

Energy concerns also intensified. Nearly two-thirds (64%) of businesses reported some degree of concern about energy prices, up five percentage points from late August. Many cited the conflict in the Middle East as a contributing factor, while concern was particularly acute in the accommodation and food services sector, where nine in 10 businesses expressed worry about energy costs.

Implications for accountants, business owners and the economy

Overall, these figures suggest that the UK economy may be entering a more subdued period, with higher energy bills and pre-budget tax uncertainty likely to weigh on household spending and business activity through the remainder of the year.

If growth does begin to falter, the Chancellor could face a budget headache as weaker economic activity and rising borrowing costs erode fiscal headroom, increasing the likelihood of further tax rises.