UK economy stagnates in third quarter

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The British economy barely grew in the third quarter and contracted in September, dealing a blow to the Labor government's plans for higher growth.

GDP grew just 0.1% as the country's key services sector struggled in the three months to September. This is below consensus expectations of 0.2% and well below the 0.5% in the second quarter.

Office for National Statistics data released on Friday showed output fell in September due to a drop in manufacturing activity.

Prime Minister Rachel Reeves has expressed disappointment with figures that track economic output from Labour's first three months in office and show how far the UK is from achieving the government's target of the highest sustained growth in the G7.

Are you satisfied with the figures released today? Of course, Reeves told the broadcaster. I want the growth to be stronger, happen faster, and be felt by families across the country.

Figures from the ONS show the services sector, which makes up around 80% of the UK economy, grew just 0.1% in the quarter, up from 0.6% in the previous three months.

They also noted that the UK underperformed G7 countries including the US, France and Germany, which grew by 0.7%, 0.4% and 0.2% respectively over the period.

Prime Minister Keir Starmer said Labor wanted annual growth of 2.5% before winning the July 4 election.

The economy lost momentum after a first quarter of growth of 0.7% and rebounded from a technical recession in late 2023. Economists say the recession shows persistent problems of low productivity and high interest rates.

Reeves claimed the previous Conservative government was responsible for the economic failure and added that growth was Labor's top priority as it seeks to reverse a decade of poor performance.

But the CBI Business Group and the Conservative opposition said the government's messaging had dampened activity ahead of the Prime Minister's tax increase budget last month.

CBI chief economist Ben Jones said uncertainty ahead of the budget, with companies delaying investment decisions, likely played a big role in the third quarter slump.

He added that Reev's follow-up move to increase employers' national insurance would trigger a more cautious approach to pay, employment and investment.

Shadow Prime Minister Mel Stride said the government had undermined confidence by criticizing the British economy when it took office.

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Previous research has shown consumer confidence falling ahead of the October Budget as consumers anticipate tax rises.

But ONS data showed the resilience of consumers as easing price pressures helped household spending rise 0.5% in the third quarter, up from 0.2% in the second quarter.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the third quarter data painted a more realistic picture of Britain's underlying growth trajectory than previous figures, which former Chancellor Rishi Sunak had claimed was growth above the OECD average.

GDP per capita, a better measure of living standards that take population changes into account, fell 0.1% compared to the previous quarter and remained 0.7% below pre-pandemic levels.

Britain's productivity, measured as output per hour worked, fell 1.8% year-on-year in the third quarter and is barely above pre-financial crisis levels, separate figures released by the ONS showed on Friday.

The Bank of England expects growth to remain sluggish in the fourth quarter of this year and predicted growth of 0.3%. The BoE cut interest rates to 4.75% this month but said it was unlikely to cut borrowing costs further before early next year as it weighs the inflation outlook.

In a Mansion House speech this week, Reeves called on financial regulators to help the economy by focusing on growth and risk. She also called for the UK to reset its relationship with the EU to overcome the structural and economic challenges caused by Brexit.

Sterling was down 0.4% at $1.262 by late afternoon in London. The pound recorded its worst week since early last year, falling more than 2% against the dollar. That gave the BoE more room to cut interest rates after data showed employment stagnating earlier in the week.

Additional reporting by Ian Smith

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