UK economy beats forecasts with 0.4% growth in July – business live

Ratings agency Fitch has predicted that the current high energy prices increase the possibility of regulatory or political intervention in markets.

Pilar Auguets, a senior director in the Fitch Ratings EMEA Utilities team, explains:

High electricity prices could intensify calls for political intervention in wholesale power markets, distorting investment signals. While structural reforms would likely require lengthy implementation and must balance affordability against investment incentives, pressure to shield households and industries from elevated energy costs is likely to increase.

European gas prices are also dropping today.

The month-ahead UK gas price is down 1.6% today at 201.77p per therm, having yesterday hit its highest level since December 2022.

Continental European gas prices are down 1.9% at €80.50 per therm, having also hit the highest level since the end of 2022 on Thursday.

Hopes of a temporary deal to reopen the strait of Hormuz are driving the oil price down today.

Brent crude is now down 2.7% at $104.70 a barrel, wiping out some of yesterday's 6% rise.

Energy prices are dropping after reports that Gulf states are considering meeting with Iranian officials next week to discuss the future of the Strait of Hormuz.

If it happens, this would be the first meeting between the top diplomats from the six-member Gulf Cooperation Council and a senior Iranian official since the US -Israel war on Iran began in February.

According to the Financial Times, the meeting is scheduled to be held on Monday in the Omani coastal city of Salalah.

Bloomberg has the details:

Oman is aiming to get foreign ministers from the Gulf Cooperation Council and Iran together on Monday in Salalah, a southern Omani city, according to a person familiar with the matter, who asked not to be identified discussing sensitive matters.

The meeting is not confirmed and worsening hostilities between Saudi-backed forces and the Houthis, a group based in Yemen and supported by Iran, may complicate the plans, another person said. Even if it happens, it's unclear if all states in the bloc, including Saudi Arabia, the United Arab Emirates, Qatar as well as Oman, will attend, the people said.

Despite today's drop, oil is up almost 9% this week, the biggest weekly jump since July.

Britain's stock market has risen this morning, as traders welcome this morning's UK GDP report.

The FTSE 100 index is up 45 points, or 0.4%, to 10,654 points.

That recovers a little of this week's losses, but the Footsie is still on track for a 1.6% weekly fall, the biggest since the start of July.

Another a week of turbulence, UK government bonds are recovering a little this morning.

With prices rising, the yield (or interest rate) on UK sovereign debt is dipping slightly.

The yield on 10-year UK bonds is down 2 basis points (0.02 of a percentage point) to 5.351%, away from the 19-year high hit yesterday.

30-year bond yields are dow 2bps too, to 5.91%, having hit their highest since 1998 yesterday.

Bond yields are very sensitive to moves in the oil price this week – crude prices are still down around 2% today, after surging yesterday to their highest since mid-May.

The Bank of England will probably leave interest rates on hold at its meeting next Thursday, predicts Susannah Streeter, chief investment strategist at Wealth Club:

For the Bank of England, today's stronger-than-expected GDP figure makes an interest rate increase this year a touch more likely. Nevertheless, given the volatile times decision-makers are meeting in, it's still likely they will once again press the pause button next week and await more data. The MPC held Bank Rate at 3.75% in July, with policymakers split 6-3, with three members voting for a hike.

The big worry is that higher energy costs will be passed on as higher prices by businesses and consumers, but it's likely that the committee will want to see more evidence of that before triggering rate hikes. Given the turmoil in energy and bond markets, however, there is an expectation that we could see three to even four rate hikes over the next year. However, if the economy slows and consumers turn more cautious, that reticence may do some of the inflation-busting work for the bank.â€

Chancellor John Healey has welcomed today's GDP report, saying:

“Britain's economy is demonstrating a welcome resilience, despite serious global uncertainty.â€

Berenberg economist Andrew Wishard also believes that July's solid GDP report could encourage the Bank of England to raise interest rates before Christmas.

He says the 0.4% growth recorded in July hints that the current bank rate of 3.75% may not be as restrictive as he and some BoE rate setters thought.

Wishard explains:

Rolling quarterly growth came in at 0.4% in May-July compared to the previous three months, in line with Q2's expansion.

Evidence that economy could cope with a solitary 25bp interest rate hike adds to the risk that the BoE will deliver one in November or December. However, as the central bank struggles to trust the official GDP data, broader evidence of solid growth would need to follow this strong outturn to convince it.

Reuters has spotted that Britain's economy grew at the fastest annual pace in 18 months in July.

British GDP in July was 1.6% higher than a year earlier, the fastest annual rate since February 2025, they point out.

The sight of the UK growing faster than expected could spur the Bank of England to raise interest rates before Christmas.

Angeline Ong, senior technical analyst at the broker IG, says today's forecast-beating UK GDP report will boost rate hike expectations:

The upside surprise hands ammunition to BoE hawks pushing for a Q4 rate hike, even as gilt yields already sit at multi-decade highs on Middle East shipping attacks and firm US data.

After this week's surge in the oil price, which drove bond yields higher, investors have already hiked their expectations for UK interest rate rises.

One rate rise by November is now priced in, with the money markets now anticipating four quarter-point hikes by July 2027, which would lift Bank rate to 4.75%, from 3.75% today.

At the start of this week, the markets were pricing in three rate rises by July 2027.

These expectations jumped yesterday, when the European Central Bank raised eurozone interest rates to 2.5% and warned that the risk of higher inflation over the next year has risen.

UK construction had a subdued July, today's GDP report shows, but at least it returned to growth!

Monthly construction output is estimated to have grown by 0.1% in July, after a fall of 0.1% in June, and a 0.8% tumble in May.

Growth in July came solely from an increase in repair and maintenance, while new work contracted again.

UK manufacturing also had a decent July, with growth of 0.9% in the month.

That helped to lift production output (a wider measure) by 0.2% in July.

Water supply; sewerage, waste management and remediation activities grew by 2.0%, but there was a 4.4% fall in mining and quarrying, while electricity, gas steam and air conditioning supply dropped by 1.5% compared with June.