Khan Capitals | August 2026
Key Takeaways
- The UK economy grew 0.4 per cent in the second quarter, exactly in line with consensus, after 0.6 per cent in the first, according to the Office for National Statistics. The annual rate of 1.2 per cent was a tenth above expectations.
- The growth came from business services, not from football. Information and communication rose 2.7 per cent and professional, scientific and technical activities 1.7 per cent. Consumer-facing services managed 0.3 per cent, and food and beverage service activities actually fell 1.6 per cent.
- The ONS did not attribute the quarter to the World Cup or the heatwave. Its quarterly bulletin does not mention either. The monthly bulletin records them only as unquantified business-survey anecdote, and notes the heat cut activity in construction and education as well as helping elsewhere.
- Investment did the work on the expenditure side. Gross fixed capital formation rose 1.2 per cent and business investment 1.7 per cent, against household consumption of 0.3 per cent and a 0.3 per cent fall in government spending.
- It complicates rather than settles the September MPC decision. Three of nine members already voted for a rise in July, and the committee now has a resilient growth print to weigh against an energy-driven inflation path.
A Beat That Was Not Quite a Beat
UK Q2 GDP growth of 0.4 per cent arrived on Thursday morning precisely where economists had pencilled it in. The annual comparison of 1.2 per cent came a tenth above the 1.1 per cent consensus, and the June monthly figure of 0.3 per cent was the genuine surprise against forecasts of no growth or a slight decline. Sterling barely moved. Gilts stayed close to where they had been all week, with the ten-year yield still hovering near 5 per cent.
Within a few hours the story had acquired a narrative. The World Cup, which began on 11 June, and the second warmest June the Met Office has ever recorded had between them flattered the numbers. Growth was borrowed from the future, propped up by one-off spending on beer and barbecues that would not repeat.
It is a tidy story, and the underlying data does not support it. The ONS quarterly bulletin makes no mention of football, sport or the tournament anywhere in its text. Its only reference to the weather is a negative one: government consumption fell partly because schools closed during the June heatwave. What actually drove the quarter was rather less photogenic than a stadium, and considerably more interesting.
| Measure | Q2 2026 | Q1 2026 |
|---|---|---|
| GDP, quarter on quarter | +0.4% | +0.6% |
| GDP, year on year | +1.2% | n/a |
| Services output | +0.5% | +0.8% |
| Production output | 0.0% | n/a |
| Construction output | +0.3% | n/a |
| Gross fixed capital formation | +1.2% | n/a |
| Business investment | +1.7% | n/a |
| Household consumption | +0.3% | n/a |
| Government consumption | -0.3% | n/a |
| GDP per head | +0.4% | n/a |
| GDP implied deflator, y/y | +2.9% | n/a |
What Actually Grew Between April and June
Eight of the fourteen services subsectors contributed positively, and the ONS names the two largest contributors explicitly. Information and communication rose 2.7 per cent, driven mainly by a 3.7 per cent expansion in computer programming, consultancy and related activities. Professional, scientific and technical activities rose 1.7 per cent, with advertising and market research up 4.3 per cent, scientific research and development up 3.9 per cent and legal activities up 2.5 per cent.
Those are not tournament industries. They are the parts of the economy that expand when firms are commissioning software, buying campaigns, funding research and paying for deal advice. The expenditure side tells the same story from a different angle: gross fixed capital formation rose 1.2 per cent and business investment 1.7 per cent, led by information and communications technology and hardware, while household consumption managed 0.3 per cent and government consumption fell 0.3 per cent.
Manufacturing was the quiet performer, up 1.0 per cent with pharmaceuticals up 4.2 per cent, though the production sector as a whole was flat because electricity, gas and steam fell 2.3 per cent and water and waste 3.7 per cent. The largest single drag on services was administrative and support activities, down 0.9 per cent, with office and business support down 2.8 per cent and security and investigation down 7.9 per cent.
The World Cup Story the ONS Did Not Tell
The tournament and the heatwave do appear in the official record, but only in one place and heavily qualified. The monthly bulletin lists them under cross-industry themes, introduced by a sentence that most coverage omitted: these were themes anecdotally reported by businesses in the monthly surveys, and it is difficult to quantify their exact impact.
On the tournament, the ONS says it was cited as a reason for higher turnover by businesses in alcohol manufacturing, wholesale, food and beverage serving, publishing, television production and advertising. On the weather, it reports positive effects cited across some manufacturing, retail, accommodation and recreation, and negative effects in construction and in education, where schools closed. No growth rate is attached to either effect anywhere in the release.
Liz McKeown, the ONS director of economic statistics, put it with three separate hedges in a single clause: some businesses reported that good weather and sporting events may have had a positive impact in June. That is a long way from the claim that a tournament delivered the quarter.
There is also a calendar problem with the popular version. The World Cup began on 11 June, three weeks before the quarter ended, and England’s run to the semi-finals happened in July. If a deep tournament run moves the national accounts, most of that effect belongs to the third quarter, not this one.
UK Q2 GDP Growth and the Consumer Who Did Not Show Up
The most direct test of the tournament thesis is whether the industries that sell to football watchers actually grew. The ONS splits services into consumer-facing and everything else, and the answer is unambiguous. Non-consumer-facing services grew 0.5 per cent in the quarter. Consumer-facing services grew 0.3 per cent.
Inside that consumer-facing group, the three-month figures are more awkward still. Accommodation rose 3.9 per cent and retail excluding motor trades 0.5 per cent, which is consistent with hot weather and some tournament travel. But food and beverage service activities, the pubs and restaurants at the very centre of the World Cup story, fell 1.6 per cent. Travel agents fell 2.4 per cent.
A quarter in which pubs and restaurants contracted is not a quarter delivered by a football tournament. The more plausible reading is that hot weather and a tournament moved spending around within the consumer economy, lifting hotels and shops while people watched matches at home rather than paying restaurant prices, and that the aggregate consumer contribution was modest either way. The growth that showed up in the headline came from firms spending on software, research and advice.
This distinction matters well beyond pedantry about attribution. If the quarter was a consumer sugar rush, it reverses mechanically and the second half is weak. If it was business investment in technology and professional services, it is a more durable form of growth that depends on corporate confidence and financing conditions rather than on the weather. Those two readings imply different things for the Bank of England, and the market has spent the day pricing the first one.
The June Rebound and the Adjustment Problem
The monthly path through the quarter was genuinely uneven. April fell 0.1 per cent, May was revised down to no growth at all from a previously reported 0.1 per cent gain, and June rose 0.3 per cent. All of the quarter’s momentum, in other words, arrived in its final month, and that is where the distortion argument has its strongest footing.
Seasonal adjustment is designed to strip out patterns that recur predictably: Christmas, summer holidays, the timing of Easter. It is not designed to remove one-off irregular events, because a statistical model cannot learn a pattern from a tournament that visits once. A June that was the second warmest on record, with three consecutive days above 37 degrees, is by construction not something the adjustment has seen often enough to normalise. To the extent that either event genuinely lifted output, that lift is still sitting inside the 0.4 per cent.
The honest position is therefore narrower than either side of the argument suggests. Some distortion is almost certainly present in the June monthly number. The claim that it explains the quarter is not supported by the sector detail, because the sectors that grew are not the sectors the distortion would have flattered. Both things can be true, and the ONS, to its credit, said as much.
Context helps too. The three-month-on-three-month rate to June was 0.4 per cent, the seventh consecutive positive reading. Against the rest of the G7 in the same quarter, the UK’s 0.4 per cent matched the United States and sat behind only Canada at 0.8 per cent, with France, Germany and Italy all at 0.2 per cent. That is not a distorted outlier. It is the shape of an economy growing slowly but consistently.
A September Decision That Just Got Harder
The Monetary Policy Committee held Bank Rate at 3.75 per cent on 29 July by six votes to three, with Megan Greene, Catherine Mann and Huw Pill all preferring an immediate quarter-point rise. Their reasoning, set out in the minutes, was that they were less reassured on the underlying disinflationary process, worried about second-round effects, and conscious that inflation had now exceeded the 2 per cent target for more than five years. Andrew Bailey used the press conference to push back, insisting the committee was not edging closer to a hike.
That hawkish minority has grown at successive meetings, from two dissenters in June to three in July. A growth print that comes in resilient, with business investment up 1.7 per cent and the deflator running at 2.9 per cent, does nothing to shrink it. The dissenters’ case rests on the idea that the economy has less spare capacity than the doves assume, and a quarter in which firms were investing is evidence for rather than against them.
Set against that, the inflation picture the committee is actually reacting to is largely imported. June CPI came in at 2.6 per cent, down from 2.8 per cent in May, and the Bank expects it to rise again later this year as higher energy prices pass through. The Ofgem cap rose 13 per cent on 1 July and is expected to rise again in October. That is an energy shock working through household bills, and raising Bank Rate does very little about it while doing a good deal to household finances that are already squeezed.
The committee next announces on 17 September. This release makes the hold marginally harder to justify on growth grounds and leaves the argument where it has been all summer: whether an energy-driven inflation path warrants a domestic monetary response. Our analysis of the July dovish hold set out how narrow that argument has become.
The Budget Standing Behind the Numbers
Growth data lands differently when a fiscal event is approaching. Andy Burnham became prime minister on 20 July, John Healey replaced Rachel Reeves as chancellor, and the gilt market delivered its verdict within hours: the ten-year yield climbed to 5.04 per cent and the thirty-year to 5.75 per cent as Burnham talked about making full use of any flexibility within the fiscal rules. We covered that repricing in the bond market’s greeting to the new prime minister.
Healey has since confirmed a Budget on 28 October, with an accompanying OBR forecast. A stronger growth number is worth real money in that context, because the OBR’s productivity and growth assumptions feed directly into the headroom against the fiscal rules. A tenth on the annual rate does not solve anything, but the difference between an economy forecast to grow around 1 per cent and one forecast to grow closer to 1.5 per cent is measured in tens of billions of pounds of assumed receipts.
The chancellor claimed the fastest growth in the G7 this year, which is a full-year and first-half framing rather than a second-quarter one, since Canada grew faster in this particular quarter. The shadow chancellor, Mel Stride, argued the economy is struggling and that the government is preparing to tax and borrow more. Both statements can be defended from the same data set, which is usually a sign that the data set is not decisive.
The more consequential number this week was not published by the ONS at all. On 12 August, Treasury modelling emerged suggesting UK growth could fall to as low as 0.3 per cent in 2027 if disruption to the Strait of Hormuz continues to the end of this year. That is the scenario the Budget has to be built against, and it makes a 0.4 per cent quarter look like a rather thin cushion.
| Forecaster | 2026 growth | Note |
|---|---|---|
| NIESR (late July) | 1.1% | Upgraded from 0.9%; warns of a stagflationary environment and a slowdown still to come |
| IMF (18 May) | 1.0% | Up from 0.8% in April, below the 1.3% forecast in January before the conflict |
| EY (August, base case) | 0.9% | Up from 0.8% in May; 1.2% pencilled in for 2027 |
| EY (Hormuz downside) | 0.5% | Implies a contraction of 0.2% in 2027 if the strait stays closed |
| HM Treasury modelling | n/a | 2027 growth as low as 0.3% if disruption persists to end-2026 |
Investor Implications
For UK equities, the composition of this quarter is more useful than its headline. If business investment in technology and professional services is genuinely expanding, that supports the domestic services and software end of the market rather than the consumer names that would benefit from a tournament-led spending surge. The pattern of pubs and restaurants contracting while accommodation grew almost 4 per cent points to a consumer that is still choosing carefully rather than spending freely, which is consistent with an energy bill that rose 13 per cent in July and is expected to rise again in October.
In gilts, the release does very little on its own, and the muted price action reflects that. The market is not trading UK growth at the moment; it is trading the fiscal question. A ten-year yield close to 5 per cent, after reaching 5.04 per cent in July on a change of prime minister, is a term premium story about borrowing and credibility rather than a statement about the output gap. Nothing in a 0.4 per cent quarter resolves it, and the 28 October Budget will matter far more than any single data release between now and then.
Across assets, sterling’s flat response is the most honest verdict available. A currency that does not move on a growth beat is telling you that growth is not the variable in question. The variables are the September MPC decision, the October energy cap, the Budget, and an oil transit route that Treasury economists are now modelling as a live threat to 2027 growth. The comparison with the collapse in September rate hike odds across the Atlantic is instructive: US pricing swung violently on two data points, while UK pricing has barely moved on any of them, because the UK’s problem is not one the Bank of England can data-dependently solve.
What to Watch
- 19 August: July CPI, the first inflation reading to capture the full effect of the 1 July energy cap increase.
- 20 August: the ONS Blue Book 2026 revisions article, which sets out the methodological changes due to be applied to the national accounts.
- 17 September: the MPC decision and minutes. The vote split matters more than the outcome, given the hawkish minority has grown at each of the last two meetings.
- Late September: the Ofgem announcement for the October price cap, the single largest identified drag on fourth-quarter household spending.
- 30 September: the Quarterly National Accounts, which bring the expenditure and income measures fully into line and frequently revise the quarterly path.
- 28 October: the Budget and the accompanying OBR forecast, the event that will set the fiscal and gilt trajectory into 2027.
Conclusion
The second quarter produced a perfectly ordinary growth number and a rather extraordinary gap between what the statisticians published and what the story became. The ONS reported 0.4 per cent, named computer programming, advertising, research and legal services as the drivers, noted that consumer-facing services barely moved and that pubs and restaurants shrank, and explicitly declined to quantify the tournament or the weather. The coverage settled on a World Cup boost.
That gap is worth closing, because the two accounts point in different directions. A consumer sugar rush unwinds by itself and makes the second half weak almost by definition. Business investment in technology and professional services is a slower, more durable thing that depends on financing conditions, corporate confidence and, at the margin, on what the chancellor does on 28 October.
None of which makes the outlook comfortable. Every serious forecaster expects the second half to be weaker than the first, energy bills are set to rise again in October, and the Treasury is modelling a 2027 in which growth falls to 0.3 per cent if the Strait of Hormuz stays disrupted. The economy is growing, slowly, for better reasons than it has been given credit for, and into a considerably harder winter than this quarter suggests.
Frequently Asked Questions
Did the World Cup actually boost UK GDP in the second quarter?
The ONS never said it did. Its quarterly bulletin does not mention the tournament at all, and its monthly bulletin lists it only as an unquantified theme reported anecdotally by businesses, with the explicit caveat that the exact impact is difficult to quantify. The sector detail argues against a large effect: consumer-facing services grew just 0.3 per cent and food and beverage service activities fell 1.6 per cent.
What drove UK Q2 GDP growth if it was not consumer spending?
Business services and investment. Information and communication rose 2.7 per cent, led by computer programming and consultancy at 3.7 per cent, and professional, scientific and technical activities rose 1.7 per cent, with advertising and market research up 4.3 per cent and scientific research and development up 3.9 per cent. On the expenditure side, business investment rose 1.7 per cent against household consumption of 0.3 per cent.
Does seasonal adjustment remove the effect of a heatwave or a tournament?
No. Seasonal adjustment removes patterns that recur predictably each year, such as Christmas trading or summer holidays. A one-off tournament or an exceptional heatwave is an irregular event that the statistical model has not seen often enough to learn, so any genuine effect remains inside the published figure. That is why the argument about distortion is legitimate even though the ONS attaches no number to it.
What does this mean for the Bank of England in September?
It makes the decision harder rather than clearer. Three of the nine members already voted for a rise in July, and a resilient growth print with business investment up 1.7 per cent supports their argument that there is less spare capacity than the majority assumes. Against that, the inflation the committee faces is largely imported through energy prices, which a higher Bank Rate does little to address. The next decision is announced on 17 September.
Sources: ONS, GDP first quarterly estimate, April to June 2026; ONS, GDP monthly estimate, June 2026; ONS, Consumer price inflation, June 2026; Bank of England, Monetary Policy Summary and minutes, July 2026; City AM, UK economy surprises again yet slowdown incoming; EY, UK Economic Outlook, August 2026; CNBC, Burnham, Healey and the gilt market; OBR, Economic and Fiscal Outlook, March 2026.
Related Reading: the gilt market’s reaction to the change of government is covered in UK gilt yields above 5%, and the policy backdrop in the Bank of England’s dovish hold. For the sector most exposed to the new government’s agenda, see UK property investment under Prime Minister Burnham, and for the contrast with US policy pricing this week, the collapse in September rate hike odds. For the fundamentals, start with how GDP releases and their revisions work and the difference between monetary and fiscal policy.
Leave a Reply