UK Economy Grows 0.7% in Fastest Expansion in Over Two Years

The UK economy expanded 0.7% between July and September, its fastest growth rate for more than two years, according to official figures from the Office for National Statistics (ONS). The number accelerates from the previous three-month period and lands the UK on course to be the second fastest growing economy across the G7, which also includes Canada, Japan, Germany, Italy and France.

The growth surprised forecasters who expected a weaker summer, given the impact of higher energy prices stemming from the Iran war. Prime Minister Andy Burnham called the figures "welcome news."

"Despite a year where events around the world have pushed up costs here at home, our economy is growing, bringing hope for the future," Burnham said.

Chancellor John Healey told the BBC the figures showed a "remarkable resilience" in the face of global conflicts, and said he hopes they "bring back confidence in Britain." Asked how government decisions could claim credit when AI investment has been the main growth driver, Healey said ministers can always "help or hinder" business confidence and investments.

What actually drove the 0.7%?

Services — the largest part of the UK economy, spanning consultancy, computer programming, hotels and restaurants — delivered the bulk of the expansion. Within services, computer programming registered its fastest growth in three years, helped by cloud computing and AI-linked spending.

The boost from computer programming and consultancy services has been the single biggest driver of UK growth so far this year. That holds even though investors have recently voiced concerns about slower AI development in the US and doubts over the long-term viability of AI firms' business models — businesses have kept investing in the technologies regardless.

Grant Fitzner, chief economist at the ONS, said it was "possible growth could have been even stronger" if there hadn't been a war in the Middle East. He cautioned that households may still not feel better off, and that prices might soon start rising faster than wages.

Sarah Coles of investment platform AJ Bell pointed to a less glamorous engine under the headline number. Since the start of the year, "it's the less visible back-office work that has delivered, with administrative and supportive services seeing strong growth," she said — precisely the areas absorbing increased AI adoption.

What does this change for businesses and households?

For practitioners, the practical question is simple: does 0.7% quarterly growth change planning assumptions? Only partially. Jake Finney, senior economist at consultancy PwC, cautioned that growth will likely slow over the coming months "unless energy markets stabilise."

A sharp rise in energy bills is forecast for January, which Finney said is likely to hit consumer spending and confidence. High energy costs trace directly to two conflicts. US and Israeli attacks led to Iran blocking the Strait of Hormuz, a vital shipping route for the world's oil and gas. Meanwhile, Russia and Ukraine have been attacking each other's oil refineries, squeezing global refining capacity and pushing up diesel and petrol prices.

The evidence from the ground is mixed but tilts positive. Richard Benc, founder of mechanical watch company Studio Underdog, says sales are running ahead of his expectations.

"We've seen more resilience than we had forecast for and expected. We are still projecting growth this year," Benc said. His business exports about 80% of its watches. "We've seen a surprising amount of resilience, particularly from our US customers," he added — though some UK customers are now taking longer to commit to purchases.

So the trade-off for firms is a strong demand backdrop today against an energy-driven squeeze on consumers early next year. Exporters to the US are faring better than domestic-facing sellers, and the AI investment cycle — visible in programming and back-office services — remains the growth story to watch.

Unless energy markets stabilise before January's bill increase, the fourth quarter may prove the high-water mark of this expansion.