What’s happening to the UK economy and how does it affect you?
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Investment in artificial intelligence (AI) helped to drive a surprise boost in the UK economy in July, according to official figures.
Economic growth matters because it affects things like pay increases for workers and the amount of tax the government raises to pay for services.
What is GDP and why does it matter?
UK economic growth is measured by the change in the country’s GDP, or gross domestic product. This includes all the economic activity of companies, governments, and people in a country.
In the UK, the Office for National Statistics (ONS) publishes new GDP figures every month. However, these can vary quite a lot and the quarterly figures – covering three months at a time – are considered more significant.
Most economists, politicians, and businesses like to see GDP rising steadily.
That’s because it usually means people are spending more, extra jobs are created, more tax is paid, and workers get better pay rises.
When GDP is falling, it means the economy is shrinking.
This can be bad news for businesses and workers as it can lead to pay freezes and job losses.
If GDP falls for two quarters in a row, that is known as a recession.
What is happening to the UK economy?
The economy expanded by 0.4% in July, the ONS said, whereas economists had predicted no growth.
It follows growth of 0.3% in June and zero growth in May.
Economists said July’s surprise growth figure showed the UK economy was proving resilient in the face of shocks, such as the US-Israel war with Iran.
The outbreak of the conflict has led to the effective closure of the Strait of Hormuz, a narrow waterway south of Iran through which one fifth of the world’s oil and gas usually flows.
This closure has led to a sharp jump in oil prices, which has fed through to higher energy and fuel prices.
Economists expect UK growth to slow in the months ahead as those costs continue to affect households and businesses.
In April, the International Monetary Fund (IMF) said it expected the Iran war to hit the UK the hardest of the world’s advanced economies.
However, the IMF currently forecasts the UK’s economy will grow by 1% this year, up from its previous estimate of 0.8%.
The Labour government has repeatedly said growth is its top priority, but has faced criticism for achieving only moderate GDP growth since it took power in 2024.
The ONS has estimated UK GDP increased by 1.3% in 2025, up from 1.0% in 2024.
How does GDP affect tax and public services?
If GDP is going up steadily, people pay more in tax because they’re earning and spending more.
This means more money for the government, which it can choose to spend on public services, such as schools, police, and hospitals.
When the economy shrinks and a country goes into recession, these things can go into reverse.
Governments tend to get less money in tax, which means they may decide to freeze or cut public spending, or put taxes up.
In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years. In response, the government borrowed hundreds of billions of pounds to support the economy.
How is GDP measured?
GDP can be measured in three ways:
Output: The total value of goods and services produced by all sectors of the economy – agriculture, manufacturing, energy, construction, the service sector, and government.
Expenditure: The value of goods and services bought by households and by government as well as investment in machinery and buildings. It also includes the value of exports, minus imports.
Income: The value of the income generated, mostly in terms of profits and wages.
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In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.
But early estimates mainly use the output measure, using data collected from thousands of companies.
Why does the GDP figure sometimes change?
The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.
At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.
The ONS publishes more information about this on its website.
What are the limitations of the GDP figure?
GDP is not the whole story asit does not include several things:
The hidden economy: Unpaid work such as caring for children or elderly relatives isn’t captured.
Inequality: Rising GDP could result from the richest getting richer, rather than everyone becoming better off, and some people could be worse off.
Living standards: If the population is also growing, increased GDP can still mean less money per person, which can reduce people’s living standards. This is why the GDP per capita measure is important.
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Some critics also argue that GDP doesn’t take into account whether the economic growth it measures is sustainable, or the environmental damage it might do.
Alternative measures have been developed which try to capture this.
Since 2010, the ONS has also measured well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people’s personal finances and the environment.
But despite its limitations, GDP is still the most widely used measure for most government decisions and international comparisons.
GDP
Economic growth
Economics
Rachel Reeves
Budget 2025
UK economy
