• Analysis
UK economy growth beats forecasts as AI spending powers 0.7% surge
The UK economy grew 0.7% in the third quarter, the fastest expansion in two and a half years, and the UK economy growth figures put Britain on course to be the second-fastest growing G7 economy this year. IT and professional services, driven by the AI rollout, delivered the surprise that City forecasters missed when John Healey became chancellor in July.
AI and datacentres led the surprise
The 0.7% quarterly expansion landed far above the City's expectations. On Healey's first day at the Treasury, officials briefed him that the most optimistic analyst pencilled in 0.3% growth, most expected close to zero and some warned of recession. Instead, households kept spending and business investment powered ahead, driven by the rollout of AI.
IT and professional services spearheaded the rise, together contributing about half of the increase in activity. Deutsche Bank estimates that AI-related spending has added roughly 0.3% to 0.4% to GDP growth this year.
Analysts at ING said the strength in IT was "very clearly a datacentre story", citing the UK's standing as a leading European destination for investment.
- •The third quarter saw 0.7% growth, the fastest in two and a half years
- •IT and professional services accounted for about half of the rise in activity
- •AI-related spending contributed an estimated 0.3% to 0.4% to growth this year
Spending held up despite the squeeze
Household consumption is up 1.6% so far this year, helped by spending over the warm summer months even as living standards came under pressure. The Iran war fuelled a surge in petrol and diesel prices, squeezing household budgets through the year.
Healey has set out to build on the groundwork laid by his immediate predecessor, Rachel Reeves, to harness AI and court global business investment - an effort that helps explain why the datacentre boom has taken root in Britain.
Warning signs for the final stretch
- •Retail sales and consumer discretionary spending fell in September, an early warning of softer demand
- •Energy bills are poised to rise by about a quarter in January, with the average annual household bill expected to exceed £2,000
- •Real wage growth is cooling and headline inflation is on track to reach a fresh peak close to 5% next year
Those headwinds point to a harder final stretch for households. The September spending fall and the January bills rise suggest the consumption that supported growth this year may come under renewed strain.
Can the run continue?
The outlook for the AI investment driving the expansion is itself less certain. After the US midterm elections and revelations at Nvidia, markets fear a bubble in AI stocks could be about to burst.
Healey, for his part, struck a defiant tone at last month's budget, arguing that the UK could continue to defy forecasters' expectations.
City investors expect at least two more quarter-point Bank of England rate increases, to 4.5%, before the end of next year. Whether the AI-driven run can survive tighter interest rates, rising bills and possible turbulence in AI stocks remains the open question hanging over the figures.
