The UK economy grew 0.7% in the third quarter of 2026, accelerating from 0.5% in the previous quarter and marking its fastest quarterly expansion since early 2024; GDP also rose 0.2% in September, ahead of forecasts.

The Office for National Statistics said consumer spending and business investment supported growth, with Sanjay Raja of Deutsche Bank highlighting investment in data centres and IT, defence, and aircraft, alongside resilient consumer spending and business confidence.

Services led the expansion, rising 0.9%, including a 1% gain in business-facing services and 0.5% in consumer-facing services; information and communication output climbed 2.1%, with computer programming and consultancy up 4.4%.

Summer spending helped hospitality, while healthcare activity also contributed; manufacturing and construction were pressured by higher energy costs and borrowing rates.

The ONS noted that many businesses reporting the largest turnover increases were involved in AI and cloud computing, amid a wider investment boom in business technology, but cautioned that its data cannot isolate AI’s contribution from other activity in those industries.

The AI investment story is not yet a guaranteed growth engine: pilots remain more common than revenue-generating deployments, and only 18% of law firms in one survey said they tracked returns on AI tools.

There are also concerns that AI stocks may be in a bubble, making the outlook for technology investment less certain and leaving the economy exposed if spending slows.

The Bank of England linked some of the strength to AI spending and a temporary boost from John Healey’s fiscal plan, but higher energy prices and interest rates could weaken growth in the final quarter.

Households face a further squeeze, with energy bills expected to rise by about 25% in January and the average annual gas and electricity bill to exceed £2,000; retail sales and discretionary spending have already weakened, while real wage growth is cooling.

Retail sales volumes fell in September, and consumer confidence suffered its sharpest monthly decline since April 2020 ahead of the October budget, underscoring the risks to domestic demand.

Sanjay Raja expects growth to cool in the final quarter as inflation and interest rates weigh on activity, although business surveys remained surprisingly resilient into November.

The prospect of inflation approaching 5% in 2027 has fuelled expectations of more Bank of England rate rises; investors priced in a 73% chance of a December increase after the November rise, though forecasts differ on the timing of further moves.