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The UK economy barely expanded in the third quarter as the dominant services sector lost momentum, underlining the challenge facing the Labour government, which has put growth at the centre of its agenda.
The economy grew 0.1 per cent in the quarter, the Office for National Statistics said on Friday, compared with an expansion of 0.5 per cent in the second quarter. The figure was below economists’ expectations of 0.2 per cent.
GDP shrank 0.1 per cent in September as manufacturing output fell.
Chancellor Rachel Reeves signalled her discontent with the figure, which recorded the country’s economic output during Labour’s first three months in office since it won the July 4 general election.
“Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers,” she said after the data release.
Labour has promised to “secure the highest sustained growth in the G7” during its term of office and Prime Minister Sir Keir Starmer said before the election that he wanted growth of 2.5 per cent a year.
But during the third quarter of this year, the services sector, which accounts for about 80 per cent of the economy, expanded just 0.1 per cent, down from 0.6 per cent in the previous period.
“Growth has gone down a gear in the third quarter,” said Scott Gardner, an investment strategist at JPMorgan-owned digital wealth manager Nutmeg.
Sterling was little changed at $1.2680 after the publication of the figures. The yield on the two-year gilt rose 0.01 percentage points to 4.4 per cent.
Reeves’ Budget late last month increased taxes and borrowing in what Labour said was a bid to repair public finances and improve public services. But many businesses say the increase in employers’ national insurance contributions will hit job creation and could lead companies to scale back investment plans.
The economy has lost momentum since the first quarter, when it grew 0.7 per cent and rebounded from a technical recession at the end of 2023. Economists said the slowdown showed the persistent challenges of low productivity and still high interest rates.
UK productivity, measured as output per hour worked, fell 1.8 per cent in the third quarter from the same period a year earlier and was barely above the levels recorded before the financial crisis, separate figures from the ONS on Friday showed.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the third-quarter figures “paint a more realistic picture of the UK’s underlying growth trajectory” than the previous figures touted by former prime minister Rishi Sunak of OECD average-beating growth.
GDP per capita, a better measure of living standards which takes into account population changes, contracted by 0.1 per cent compared with the previous quarter and remains 0.7 per cent below its pre-pandemic level.
The Bank of England expects growth to remain lacklustre in the final quarter of the year and has forecast a 0.3 per cent expansion. Earlier this month, the BoE cut interest to 4.75 per cent but indicated that a further reduction in borrowing costs was unlikely before early next year, as it weighs the outlook for inflation.
Previous surveys showed that consumer confidence fell in the run-up to October’s Budget as consumers anticipated tax increases. However, the ONS data showed resilience among consumers as easing price pressures helped household spending rise 0.5 in the third quarter, up from 0.2 per cent in the second.
Output in consumer-facing services industries, such as bars and restaurants, rose 0.5 per cent in the third quarter and business investment climbed 1.2 per cent.
The construction sector expanded by 0.8 per cent in the quarter.
The UK’s quarter-on-quarter GDP figure for the three months to September compares with a 0.7 per cent expansion in the US and 0.4 per cent in the Eurozone.
