The UK economy expanded at its quickest pace in more than two years during the three months leading to September, according to fresh data that has taken economists by surprise. The 0.7% growth rate has been described by analysts as "top gear" and "strikingly strong," a notable upgrade from earlier characterizations like "solid" and "resilient."
A Remarkable Turnaround
Against a backdrop of global energy disruptions, rising borrowing costs, and a series of challenging summers since the pandemic, this growth is particularly impressive. It challenges the prevailing narrative of economic gloom that has dominated discussions about the UK's performance. Since the pandemic, the UK's average growth in the third quarter has been less than 0.1%, and just months ago, forecasts for this period hovered around 0.1%. Even the Office for Budget Responsibility (OBR) had penciled in only 0.3% growth at the recent Budget. This figure has not been exceeded outside the pandemic since 2017, positioning the UK as the second fastest-growing economy among the G7 nations, trailing only the United States.
Drivers of Growth
While the latest figures dispel some of the doom, they do not signal a boom either. Spending on artificial intelligence and technology has been a key driver of the upside surprise. Although the AI data center boom could eventually turn to bust, current figures suggest that investment in these technologies is bolstering growth. Consumer resilience, at least until the autumn, has also contributed, possibly aided by improved economic sentiment. Additionally, sterling reached post-Brexit referendum highs last week, and productivity and investment are looking stronger, especially after recent revisions. Private sector business investment figures are particularly encouraging.
Challenges Ahead
However, this momentum may not carry into the final quarter of the year. Consumer confidence has already dipped as petrol and domestic energy prices begin to rise again. The cost-of-living pressures are expected to pose significant challenges in the coming months, and construction and private house building remain depressed. The Iran conflict remains a major unknown, and a durable end to the conflict in the Gulf could help bring down petrol prices, energy bills, government borrowing costs, and mortgage costs. Downing Street is likely to invest heavily in a "settlement of the conflict," which the chancellor has described as the "best economic policy."
International Context
Global stocks have plunged amid fears of a US AI slowdown spreading to Asia and Europe, underscoring the interconnectedness of the world economy. Yet the UK's recent performance stands out. The chancellor's visit to Nexeon in Oxfordshire, a company searching for a UK factory to manufacture cutting-edge electric vehicle batteries, and colleagues' visits to British watchmakers in Maidenhead carving a niche against the Swiss, highlight the potential for innovation and niche manufacturing. These examples illustrate the underlying strengths that could drive future growth.
In summary, the UK economy has shown remarkable resilience, but it faces headwinds that could temper growth in the near term. The government's focus on resolving international conflicts and supporting key sectors will be crucial in sustaining this momentum.
