Unlock the Editor’s Digest for free

The UK economy barely grew in the third quarter and contracted in September, in a blow to the Labour government’s plans to deliver higher growth.

GDP rose just 0.1 per cent as the country’s dominant services sector struggled during the three months to September, less than consensus expectations of 0.2 per cent and well below the second quarter’s 0.5 per cent.

Output fell in September itself, dragged down by a slide in manufacturing activity, according to data released on Friday from the Office for National Statistics.

Chancellor Rachel Reeves signalled her disappointment with the figures, which track economic output during Labour’s first three months in office and signal how far the UK is from reaching the government’s goal of “the highest sustained growth in the G7”.

“Am I satisfied with the numbers published today? Of course not,” Reeves told broadcasters. “I want growth to be stronger, to come sooner, and also to be felt by families right across the country.”

The ONS figures showed that the services sector, which accounts for about 80 per cent of the UK economy, expanded just 0.1 per cent in the quarter, down from 0.6 per cent in the previous three months.

They also noted that during the period, the UK underperformed G7 nations including the US, France and Germany, which expanded respectively by 0.7 per cent, 0.4 per cent and 0.2 per cent.

Prime Minister Sir Keir Starmer said before Labour’s July 4 election victory that he wanted growth of 2.5 per cent a year.

The economy has lost momentum since the first quarter, when it grew 0.7 per cent and rebounded from a technical recession at the end of 2023. Economists said the slowdown showed the persistent challenges of low productivity and high interest rates.

Reeves argued the previous Conservative government was responsible for the economy’s failings, adding that growth was Labour’s “number one mission” as it sought to “turn around the poor performance of the last decade”.

But the CBI business group and the Tory opposition said the government’s messaging had depressed activity ahead of the chancellor’s tax-raising Budget last month.

Ben Jones, lead economist at the CBI, said uncertainty ahead of the Budget “probably played a big part” in the third-quarter stagnation, with companies delaying investment decisions beforehand.

He added that Reeves’ subsequent move to increase employers’ national insurance would also “trigger a more cautious approach to pay, hiring and investment”.

Mel Stride, shadow chancellor, said the government had “talked down the UK economy” on coming to office, hitting confidence.

Previous surveys showed that consumer confidence fell in the run-up to October’s Budget as consumers anticipated tax increases.

However, the ONS data showed resilience among consumers as easing price pressures helped household spending rise 0.5 in the third quarter, up from 0.2 per cent in the second.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the third-quarter data painted “a more realistic picture of the UK’s underlying growth trajectory” than previous figures touted by former prime minister Rishi Sunak of OECD average-beating growth.

GDP per capita, a better measure of living standards that takes into account population changes, contracted by 0.1 per cent compared with the previous quarter and remains 0.7 per cent below its pre-pandemic level.

UK productivity, measured as output per hour worked, fell 1.8 per cent in the third quarter from the same period a year earlier and was barely above the levels recorded before the financial crisis, separate figures from the ONS on Friday showed.

The Bank of England expects growth to remain lacklustre in the final quarter of the year and has forecast a 0.3 per cent expansion. The BoE cut interest to 4.75 per cent this month but indicated that a further reduction in borrowing costs was unlikely before early next year, as it weighs the outlook for inflation.

In her set piece Mansion House speech this week Reeves called for financial regulators to help the economy by focusing on growth as well as risk. She also called on the UK to “reset” its relationship with the EU to overcome structural economic challenges from Brexit.

Sterling fell 0.1 per cent to $1.2658 after the publication of the figures. The yield on the two-year gilt fell 0.01 percentage points to 4.41 per cent.