UK faces economic stagnation in Q3 as dominant services sector falters

The UK economy stalled in the third quarter as the services sector lost steam. The 0.1% growth in Q3 was way below the 0.5% expansion in Q2 and the 0.2% expected by economists.

The media company reported that the UK economy barely saw any increase in Q3, underlining the challenges facing the Labour government, which placed growth at the core of its agenda. The dominant service sector, which accounts for nearly 80% of the economy, grew by 0.1% to overshadow the construction sector, which grew 0.8%. 

UK economic growth in Q3 below economists’ expectations

The 0.1% growth by the end of September is a sign of how much the UK economy lost momentum over the three-month period. The reported growth was also below economists’ expectations. The UK’s quarter-on-quarter GDP achievement for the three months to September was below 0.7% in the U.S. and 0.4% in the Eurozone. 

Notably, Chancellor Rachel Reeves increased borrowing and taxes in her budget late last month in a bid to improve public services and repair public finances. However, many businesses said the increase in employers’ national insurance would hurt job creation and cause companies to scale back on their planned investments. 

According to the report, the Bank of England authorized interest cuts to 4.75% earlier this month; the BoE indicated that borrowing costs are likely to be effected in early 2025. 

“Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers.”

– Rachel Reeves

Additionally, the Bank of England expects the UK’s economic growth to remain slow in the final quarter of 2024. After considering the outlook for inflation, it projected 0.3% growth. 

The BoE predicts a stronger 2025 but trims 2024’s annual growth forecast to 1%.

The Bank of England forecasted strong economic growth in 2025 but reduced its 2024 annual growth prediction from 1.25% down to 1%. Danni Hewson, head of financial analysis at AJ Bell, revealed that this year’s positive economic outlook fizzled out in Q3. 

According to the ONS, growth was lower than expected, and activity was subdued across most industries during Q3. Only Italy’s Q3 growth was worse than the UK’s, which was slower than in Japan (0.2%), Germany (0.2%), and France (0.4%). 

David Bharier, head of research at the BCC (British Chambers of Commerce), also pointed out that last month’s budget had given UK businesses a welcome indication of the government’s long-term framework to boost growth. The contents of the budget ended up boosting the growth and inflation picture for 2025, added Abrdn’s deputy chief economist Luke Bartholomew.