UK growth falters leaving the Chancellor even more exposed
A weak Q3 underscores a stalling recovery
The UK economy contracted slightly in September, with a sharp drop in car production (related to the cyber-attack which hit Jaguar Land Rover) contributing to GDP slipping 0.1% on August. That left output up just 0.1% over the third quarter, slower than the 0.3% recorded in Q2 and below both Bank of England and consensus expectations. Coupled with a softening labour market, the data add to mounting evidence that economic and political uncertainty is weighing on activity. A Bank of England rate cut in December now looks even more likely.
Expenditure breakdown: not much to celebrate
The Q3 expenditure breakdown offered little encouragement.
Consumer spending rose a modest 0.2%, leaving the UK’s most important growth driver still less than 1% above pre-Covid levels.
Business investment fell for the second consecutive quarter - underlining the UK’s distance from the AI-driven investment surge now powering the US economy.
Trade was a relative bright spot: exports dipped slightly, but a sharper fall in imports meant net trade provided a small boost to quarterly GDP.
Prospects for this year and 2026
The weak Q3 outturn makes our above-consensus forecast of 1.5% GDP growth in 2025 increasingly uncertain. With JLR production now resumed, GDP growth in October should see some bounce back. But the economy’s weakness over the summer offers a poor launchpad for expansion in Q4.
Even so, we remain less downbeat than most forecasters about 2026. The forthcoming Budget is likely to deliver sizeable tax rises and spending restraint, weighing on near-term demand. But tighter fiscal policy will also give the Bank of England scope to cut interest rates more decisively, supporting household spending and business activity as the policy mix pivots.
Crucially, households and firms still have the capacity to expand consumption and investment: debt burdens are at multi-decade lows and savings rates are elevated. If confidence improves, the private sector has headroom to save less and borrow more.
Inflation set to ease
Inflation appears to have peaked and is likely to fall in the coming months, helped by base effects and lower oil and petrol prices. This should ease the pressure on real incomes, even as nominal wage growth cools. Positive spillovers from rate cuts and fiscal expansion in the US and Europe should also support UK growth through 2025–26.
What it means for Business
For businesses, the message is mixed:
Demand remains fragile. Consumer spending is barely above pre-Covid levels, meaning many firms are still operating in a low-growth market.
Investment hesitancy is deepening. Consecutive declines in business investment reflect uncertainty over the economic outlook, tax policy, and the regulatory environment.
Financial conditions may continue to improve. If the Bank of England cuts rates more sharply in 2026, borrowing costs are likely to ease, supporting capex plans, refinancing, and working-capital pressures.
Global conditions are turning more supportive. Interest rate cuts abroad and expansionary fiscal policy in the US and Europe may boost UK exporters and supply chains.
Policy clarity matters more than ever. Businesses will be looking to the Budget for long-overdue signals on infrastructure, planning reform, tax stability, and energy costs.
Our take
The fundamentals of the UK economy are not as bleak as today’s GDP figures suggest. Inflation is easing, the global backdrop is improving, and households and firms still have the balance-sheet strength to drive a recovery. The problem is confidence, still the missing ingredient.
Unless the Chancellor uses the Budget to deliver a credible, pro-growth framework that reduces uncertainty, tackles regulatory bottlenecks, and addresses persistently high energy costs, these improving fundamentals will not translate into stronger growth. Without that shift in sentiment, the UK risks another year of underperformance.
