The UK economy’s surprise summer growth spurt is set to be “blown away” by a spike in energy prices and a recent surge in the cost of borrowing, economists have warned the government.

Fresh figures revealed on Friday that the economy expanded 0.4 per cent in July, ahead of initial forecasts that predicted flat growth.

But economists have warned ongoing fiscal pressures triggered by the US-Iran war ahead of the Budget will continue to weigh on the public purse.

“The UK economy was still holding up better than most had expected in July, but this may just be the calm before the next storm,” Julian Jessop, economics fellow at the Institute for Economic Affairs, said. 

“Unfortunately, any good news from two months ago is now being blown away by the fresh headwinds coming from energy prices and the bond markets. The UK economy is still lurching from crisis to crisis.”

A large part of July’s unexpected boost came from a booming period for artificial intelligence and cloud computing firms, which recorded a surge in revenue in the period.

‘Growth is going to be hard to come by’

Yael Selfin, chief economist at KPMG, said the boost should lend some support to the public finances ahead of John Healey delivering his first Budget but warned it was unlikely to materially expand his room for manoeuvre.

“With borrowing costs elevated and competing spending pressures remaining significant, difficult decisions on tax and spending are likely to remain unavoidable,” Selfin said.

Some economists have forecast the £22bn in fiscal headroom left by Reeves in her 2025 Budget could be as much as halved after gilt yields spiked in a recent bond sell-off.

Analysts have warned Healey has little room for further borrowing and will be forced to hike taxes in order to stay within the fiscal rules, which state that day-to-day spending must match receipts by 2030.

“Growth is going to be hard to come by so [July’s surge] may not last, especially as activity is likely to stall ahead of the Budget,” Richard Carter, head of fixed interest research at Quilter Cheviot, said.

“Calls for pro-growth measures will get louder as the Budget nears, but whether or not the government has the room to act remains to be seen, especially if more tax levers are likely to be pulled.” 

In his first major speech as Chancellor at the beginning of the week, Healey said he would not “speculate on questions of tax“.

Responding to the GDP figures, Healthy said: “Britain’s economy is demonstrating a welcome resilience, despite serious global uncertainty.”

“Our growth, although still fragile, was the fastest in the G7 in the first half of the year. But, the conflict in the Middle East does have impacts here at home – from the cost of the weekly family shop to the cost of government borrowing.”