UK GDP: peak headline rate masking a fundamental improvement

An unexpected fall of 0.1% month-on-month (m/m) in September meant that growth in Q3 as a whole only managed a meagre 0.1% q/q. This was disappointing, we had been expecting growth of 0.2%, and suggests that the economy has lost some momentum. Indeed, the economy has only grown in two out of the last six months. However, the weak headline rate is masking an improvement in the fundamentals. We still expect growth to pick up sharply in Q4 and into Q1. 

We doubt that the weakness in growth in Q3, given it was largely driven by erratic components, will tempt the Monetary Policy Committee (MPC) into another rate cut in December. We'll have to wait until February for our next rate cut.

UK economic performance across various sectors

Starting with September, services output was flat but most of the weakness was due to a massive 2% m/m drop in the IT sector. Output here is volatile and will probably bounce back in Q4. Elsewhere the news in services was good. Retail trade grew 0.3% m/m and hospitality also had a good month, with output rising 0.5% m/m. Professional services boomed, with output rising 0.5% m/m, some of this was probably due to activity being pulled forward ahead of the Autumn Budget so we expect October to be another good month for professional services.

Manufacturing was disappointing, falling by 0.5% m/m – largely driven by a big drop in car manufacturing. Meanwhile, construction output surprisingly rose 0.1% m/m in September despite the extremely wet weather in parts of the country. The strong construction PMI — 54.3 in October — suggests output will continue growing solidly.

Turning to quarterly GDP and expenditure, Q3 GDP growth was driven by consumer spending, which rose 0.5% q/q after gaining 0.2% in Q2. Government spending rose by 0.6% q/q and business investment by 1.1% q/q. In an encouraging sign of business confidence, corporate investment rose 1.2% q/q, and 4.5% y/y, the strongest annual gain since 2023 Q1.

Quarterly GDP growth was dragged down by a -0.6 percentage point contribution from net trade and inventories. That tells us nothing about the wider economy, and instead reflects the UK’s role as a gold trading hub.

The outlook for future economic growth

We expect growth to pick up to 0.3% or even 0.4% in Q4 24, as household consumption continues to expand. Our view is that the recovery in consumer spending has further to run, supported by higher real incomes and falling interest rates.

That will ensure modest GDP gains over the course of 2025, though a return to the fast growth rates of the first half of the year will be difficult. We're currently expecting a gain of 0.3% in Q4 to leave growth at around 1% this year and 1.8% in 2025.

There is a high degree of uncertainty around the outlook. While looser fiscal policy is set to lift activity, it’s less clear how businesses will respond to the increase in National Insurance Contributions and in the National Living Wage – in a context of subdued demand and compressed margins, it’s possible firms will cut back on headcount, dragging on activity. The new Trump administration also poses a risk to growth and inflation. 

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