The UK economy expanded by 0.7% in the three months to September, the fastest quarterly pace in more than two years, as spending on artificial intelligence and technology and resilient household demand offset pressure from energy costs, borrowing costs and the conflict in the Gulf.
Economists described the figure as “top gear” and “strikingly strong,” an upgrade from earlier descriptions of “solid” and “resilient” and a sharp turn from talk of Britain being the “hardest hit by the Iran War.” The growth came against the biggest disruption to global energy flows, rising market borrowing costs and a run of difficult summers since the pandemic. It also offers a counterweight to the self-reinforcing negative narrative that has surrounded the UK economy.
The scale of the surprise is clear in the recent forecasts. UK growth averaged less than 0.1% in the four July-to-September periods since the pandemic. Just months ago, the average prediction for this year’s third quarter was 0.1%. The Office for Budget Responsibility, the UK’s official forecaster, effectively penciled in 0.3% at the Budget only three weeks ago. Outside the pandemic, the 0.7% figure has not been exceeded since 2017.
The result puts the UK on course to be the second-fastest-growing economy in the Group of Seven after the United States, ahead of Canada, Japan, Germany, Italy and France. It is tempting to ask what the economy would have done without the Iran War, or if interest rates had been cut instead of rising recently.
Growth is not yet a boom
The latest number kills the doom but does not amount to a boom. Spending on AI and technology has driven the surprise upside over the year. The AI data-center boom could turn to bust at any point, but the figures suggest that investment in these technologies across the economy is helping to lift growth.
Consumers have been resilient, at least until the autumn, perhaps helped by better economic sentiment. High UK borrowing costs have drawn understandable attention, but another gauge of the country’s international standing has improved: sterling reached its highest level since the post-Brexit referendum period last week. Productivity and investment also look stronger, especially after recent revisions. Some of the most encouraging numbers are in private-sector business investment.
The chancellor was at Nexeon in Oxfordshire, a company that is searching for a UK factory to manufacture its advanced electric-vehicle battery and British technology. British watchmakers in Maidenhead are also carving out a niche to take on the Swiss.
Those green shoots may not carry through the final three months of the year. Consumer confidence has already fallen as petrol and domestic energy prices start to rise again. Households face a significant challenge from cost-of-living pressures in the coming months. Construction and private housebuilding remain depressed.
The Iran conflict remains the big unknown
The Iran conflict remains the big unknown, including whether a durable end to the fighting in the Gulf can be reached after the US midterm elections. Some oil and gas production in the region is starting to normalize. A settlement could bring down petrol prices, energy bills, government borrowing costs and mortgage costs.
Downing Street is expected to invest heavily in a “settlement of the conflict,” which the chancellor described as the “best economic policy.”