Britain's economy expanded by 0.7% in the third quarter, matching analysts' forecasts and accelerating from a revised 0.5% in the previous three months, according to data released Thursday by the Office for National Statistics (ONS). The services sector was the primary engine, with computer programming, consultancy, and related activities surging 4.4% as businesses ramped up spending on artificial intelligence and cloud computing.
Overall GDP stood 1.9% higher than a year earlier, and monthly figures showed a 0.2% uptick in September after a flat August. The ONS noted that computer programming and consultancy have been the largest contributors to GDP growth throughout 2026, with many firms reporting increased turnover linked to AI and cloud services, though quantifying the exact impact remains challenging.
AI's ripple effect across the economy
The information and communication sector as a whole rose 2.1%, but the influence of AI extended beyond tech. Manufacturing output grew 0.9% in the three months to September, led by a 4.6% jump in computer, electronic, and optical products. Sarah Coles, head of personal finance at AJ Bell, pointed to this as further evidence of AI-driven demand. "It's another area where growth is underpinned by demand for AI," she said.
Coles also noted that despite investor concerns about the long-term profitability of heavy AI investment, its gradual adoption is already helping businesses in administrative and support services. "Given the global backdrop, the rising cost of living, and the fact we were heading for the uncertainty of the Budget, growth held up well in the third quarter," she added. "And AI continued to do a significant portion of the heavy lifting."
Production output edged up just 0.1%, while construction fell 0.7%, underscoring the uneven nature of the recovery. The UK remains the world's fifth-largest economy by nominal GDP, trailing only the US, China, Germany, and Japan.
Energy costs and monetary policy
The Middle East conflict, particularly the Iran war, has pushed up energy prices, adding to inflationary pressures. UK inflation reached 3.5% in September, partly due to higher household energy bills and motor fuel costs. In response, the Bank of England last week raised its benchmark interest rate by a quarter of a percentage point to 4%, the first increase since August 2023. The central bank also upgraded its growth forecasts for 2026 and 2027 to 1.6% and 1.3%, respectively, citing AI-related business investment as a key factor.
Chancellor John Healey struck a confident tone, saying, "The Middle East conflict has hit growth worldwide, yet Britain is showing stand-out resilience." However, not all observers share his optimism. Kit Rees, an investment strategist at Quilter, described growth as "robust, if unspectacular by historic standards," and warned that higher employment costs, rising energy prices, and squeezed household budgets are likely to weigh on the economy into 2027.
The UK's performance stands in contrast to some of its European neighbours. While German industrial output rebounded unexpectedly in September, the broader eurozone has struggled with sluggish growth. The UK's reliance on services, particularly in tech, has provided a buffer, but the persistent energy shock from the Middle East remains a risk. As European campaigners push for a freeze on new data centres over environmental concerns, the UK's AI-driven growth model could face scrutiny.
For now, the data suggests that the UK economy is navigating a difficult global environment better than many expected, but the path ahead is fraught with challenges. The Bank of England's rate hike, aimed at curbing inflation, could dampen consumer spending and business investment in the coming quarters. As Rees noted, the resilience seen in Q3 may not be sustainable if energy costs remain elevated and the labour market tightens further.
