UK economy stalls in third quarter

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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 that 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.

The services sector, which accounts for about 80 per cent of the economy, expanded 0.1 per cent, overshadowing a 0.8 per cent expansion in the construction sector.

In a sign of how momentum faded over the three-month period, the economy contracted 0.1 per cent in September, largely because of falling manufacturing output.

In her Budget late last month, chancellor Rachel Reeves 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.

Following the release of the data on Friday, Reeves said: “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers.”

Sterling was little changed at $1.2680 after the publication of the figures.

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 given long-standing challenges over poor productivity and persistent supply side constraints”.

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.

“Growth has gone down a gear in the third quarter,” said Scott Gardner, an investment strategist at JPMorgan-owned digital wealth manager Nutmeg.

Surveys showed that consumer confidence fell in the run-up to October’s Budget as consumers anticipated tax increases. However, the ONS data on Friday showed that consumer spending rose 0.5 in the third quarter, up from 0.2 per cent in the second. Business investment also expanded by 1.2 per cent.

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. It had predicted growth of 0.2 per cent in the second quarter.

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.

Easing price pressures led to a pick-up in household spending in the first quarter of the year, helping the economy rebound from a technical recession at the end of 2023.