The UK economy grew at its fastest pace since 2024 in the third quarter, with a 0.7% expansion driven by household spending, business investment, and government spending. Household consumption rose 0.6%, contributing significantly to the growth, while AI-related activity in professional services accounted for nearly a quarter of the annual 1.9% growth. Net exports were the only component that did not contribute positively.
September's monthly figures also showed strength across services, manufacturing, and construction, suggesting continued momentum into the year's end. BCA Research noted in a Friday report that the Bank of England (BoE) may adopt a more hawkish stance at upcoming meetings, concerned about inflation passing through to prices. The firm's growth diffusion index indicates a widening range of improving economic data.
Despite the strong performance, risks to growth remain elevated for next year. Household consumption is seen as the most vulnerable, with falling consumer confidence, declining real wages, and rising energy bills expected to weigh on spending. The Ofgem price cap update in January is anticipated to further increase household energy costs. BCA Research suggests that weak spending and a soft labor market should limit inflation's impact on underlying prices next year, potentially reducing the need for BoE rate hikes compared to the 90 basis points currently priced into the SONIA curve.
Key data releases next week will test these views. UK employment figures on Tuesday could strengthen the case for another BoE rate hike if private-sector pay growth is firmer. Inflation data on Wednesday is expected to show a rise in headline inflation due to the higher Ofgem price cap, with services inflation being a critical gauge of second-round effects. Retail sales on Friday are likely to remain subdued due to higher energy bills and weak consumer confidence.