UK economy grows 0.7% in the third quarter, led by business services

The UK economy grew by 0.7% in the July-to-September quarter, up from 0.5% in the previous quarter, the Office for National Statistics (ONS) said on Thursday, November 12. GDP was 1.9% higher than a year earlier.

Growth was concentrated in services, while construction shrank.

Business services did most of the work

Services output rose 0.9% in the quarter after a 0.6% rise in the second, the ONS said. Business-facing services grew 1.0% and consumer-facing services 0.5%. Administrative and support services, information and communication, and professional, scientific and technical activities were the largest positive contributors.

The production sector grew 0.1%, after a 0.1% fall in the second quarter, and manufacturing was its only positive contributor, up 0.9%. Construction output fell 0.7% and is 1.7% lower than a year earlier.

Education and accommodation and food services were the negative contributors within services, each down 0.5%. Food and beverage service activities fell 1.9%.

Households and investment drove spending

On the expenditure side, the ONS said growth came mainly from household consumption and gross fixed capital formation. Real household spending rose 0.6% in the quarter and is 1.8% higher than a year earlier. Gross fixed capital formation rose 1.7%, with other machinery and equipment and transport equipment as the main drivers.

Real GDP per head rose 0.7% in the quarter and is up 1.7% on the year, the ONS said.

A strong July and a flat August

The monthly figures show an uneven quarter. GDP grew 0.4% in July, was flat in August (revised down from 0.1% growth) and grew 0.2% in September, according to the ONS. The quarterly rate of 0.7% is a first estimate. The ONS notes that the mean absolute revision between its first estimate and the final one, published three years later, is 0.27 percentage point.

What the Bank of England said a week earlier

The Bank of England's Monetary Policy Committee voted 8-1 on November 5 to raise Bank Rate by 0.25 percentage point to 4%, as FinanceInTime reported. One member voted for a rise of 0.5 point. In its minutes the committee said there was "uncertainty around the extent to which the recent strength in GDP growth might persist", but that on balance members judged it "likely to fall back somewhat in the coming quarters".

The Bank expects UK consumer price inflation to rise to around 5% by the middle of next year. The Bank's next decision is due on December 17, according to its schedule.

We would read the strength as business activity, not yet as household comfort

Our reading is that the 0.7% is better news than the mix behind it. Business-facing services grew twice as fast as consumer-facing ones, and the August stall shows how uneven the quarter was. The Bank itself expects growth to fall back, so one strong first estimate does not settle the question for policy.

The opportunity is that firms and investment are expanding while energy costs bite, which would help productivity if it lasts. The threat is that stronger growth makes the Bank's task harder if inflation heads toward 5%. We expect the committee to treat this as a reason for caution, not for a pause, if services and wages stay firm. We would change that view if the revision to the first estimate is large, or if consumer-facing services weaken further.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.