UK Q2 GDP revised up, fastest growth among G7 in the first half of the year: a "pre-rate hike" report card delivered ahead of the budget announcement

According to Jinse Finance APP, revised data released by the UK Office for National Statistics (ONS) on Wednesday showed that the UK's Q2 GDP grew by 0.5% quarter-on-quarter, higher than the initial value of 0.4%. Coupled with a 0.6% growth rate in Q1, the overall performance of the UK economy in the first half of the year was significantly better than previous estimates—according to ONS, the UK is set to be the fastest-growing G7 economy in the first half of 2026. Liz McKeown, ONS Director of Economic Statistics, said: "Stronger growth in the services sector in the latest quarter means the size of the UK economy is slightly higher than previously estimated."

More Upgrades, Fewer Downgrades

This revision is almost entirely positive: the quarter-on-quarter growth rate of the services sector was raised from 0.5% to 0.6%, with professional, scientific, and technical activities surging 2.3% and information and communication rising 2.5%. The scale of Q2 GDP is now 2.0% higher than Q4 2024, slightly above the initial estimate. There were only two downgrades—the production sector, hurt by school closures during the June heatwave, was adjusted down to -0.1% quarter-on-quarter, and full-year growth for 2025 was slightly revised down from 1.3% to 1.2%.

Signals from households are even more important than aggregate data: real household disposable income per capita rebounded by 1.0% quarter-on-quarter after a 0.8% drop in Q1, the largest increase since the end of 2024; the household savings rate rose to 8.8%. Consumption did not stall, but became more cautious. The external balance also improved: the current account deficit stood at £19.9 billion, better than the expected £24.7 billion, and narrowed to 1.4% of output excluding precious metal trade—the smallest in five years. After the data was released, the pound continued its rise, reaching as high as 1.3277 during the European session.

But This Is a "Pre-Rate-Hike" Report Card

The issue is about timing. The growth captured by these revised statistics occurred before the sharp rise in energy prices and borrowing costs—the UK’s August CPI reached 3.1%, mainly driven by petrol and diesel prices; the Bank of England on September 17, by a 6:3 vote, kept its benchmark rate unchanged for the sixth consecutive meeting (at 3.75%), but the tone has clearly turned hawkish: the Bank expects inflation to hit 3.75% at the end of 2026 and slightly above 4% in the first quarter of 2027, which is double the target rate. The meeting minutes emphasize that the indirect effects of the energy shock "are more likely to be delayed than diminished." Governor Bailey put it bluntly: the longer energy price volatility persists, "the more likely we are to need to raise the Bank Rate." Most institutions expect a rate hike in November or December.

In other words, the UK is in a delicate position: growth data supports an "ability to withstand rate hikes," while inflation data argues for a "need to hike." XTB analyst Kathleen Brooks points out another angle—since inflation is being driven by global oil prices beyond the central bank’s control, hiking rates "may be entirely meaningless."

The Real Test Is on October 28

For the markets, this report card mainly serves to lift the baseline ahead of the October 28 budget announcement. Prime Minister Andy Burnham announced at the Labour Party’s annual conference this week adjustments to the pension "triple lock" and a pledge to lower household energy bills, while Chancellor John Healey reiterated his commitment to sticking to fiscal rules. The gilt market has so far accepted this stance, with the 10-year yield falling 6 basis points to 5.35% on September 30. But having just pushed the 30-year yield to a new 26-year high of 5.95% last week, the Bank of England was forced to adjust its quantitative tightening plan, abandoning long-dated gilt sales. Schroders’ Global Head of Economics David Rees was blunt: the current economy does not urgently need a rate hike; the greater risk lies in fiscal policy—if the budget plan boosts spending significantly, inflation could reignite and bring forward the timing of rate hikes.

The underlying strength of the UK economy is greater than expected, but this actually narrows the space for fiscal expansion—the better the data, the less room there will be to maneuver on October 28, and the lower the threshold for a potential November rate hike.