UK growth beats forecasts in third quarter, but outlook for year-end is uncertain

The UK economy expanded by 0.7% in the July to September quarter, the quickest rate of growth in more than two years, according to an analysis by Faisal Islam for BBC News. The result came in well above expectations and, by the analysis, leaves the UK on track to be the second fastest growing G7 economy after the United States.

Well ahead of predictions

Forecasters had expected far less. The average prediction only months earlier was 0.1%, and the Office for Budget Responsibility had effectively assumed around 0.3% at the Budget three weeks before the figures were published. Since the pandemic, growth in the third quarter of the year has averaged under 0.1%. Outside the pandemic period, quarterly growth at this level has not been surpassed since 2017.

The strength arrived despite major disruption to global energy flows linked to the Iran War, higher market borrowing costs and a recent rise in interest rates. The analysis describes the outcome as ending the gloom without amounting to a boom.

What drove the increase

• Technology investment: spending on artificial intelligence and related technology has driven much of the unexpected strength over the year, although the analysis warns the data centre boom could reverse.
• Business investment: private sector investment and productivity figures look stronger, particularly after recent revisions.
• Consumers: household spending held up, at least until the autumn.

Sterling also reached its highest level since the Brexit referendum the previous week, which the analysis treats as another sign of the economy's international standing.

Risks for the final quarter

The momentum may not carry into the last three months of the year. Consumer confidence has already weakened as petrol and household energy prices climb again, cost-of-living pressures are expected to bite, and construction and private housebuilding remain weak. The course of the Iran conflict is described as the main unknown. A lasting settlement could lower fuel prices, energy bills, mortgage costs and government borrowing costs, and the chancellor called such a settlement the "best economic policy".

For business owners, the figures suggest that demand and investment have been firmer than many expected, especially in technology. At the same time, rising energy costs and softer consumer confidence point to a more cautious end to the year, making budgeting and cost planning particularly important in the months ahead.