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The UK economy grew by 0.7% in the third quarter of 2026, its fastest pace in two and a half years, according to figures published by the Office for National Statistics on Thursday 12 November. Growth accelerated from 0.5% in the second quarter, and output rose by 0.2% in September alone, beating forecasts of a flat month.
The headline number matched economists’ expectations, but the composition matters more than the total. Almost all of the expansion came from services, and much of that from a single corner of the economy: businesses linked to artificial intelligence and cloud computing.
Services did the heavy lifting
According to the ONS release, services output grew by 0.9% in the quarter, production edged up by 0.1% and construction fell by 0.7%. The information and communication sector rose by 2.1%, driven by a 4.4% jump in computer programming, consultancy and related activities. The statistics office said this industry has been the largest single driver of growth across 2026, with many of the fastest-growing firms involved in AI and cloud work.
On the spending side, household consumption rose by 0.6% and business investment, measured as gross fixed capital formation, increased by 1.7%. Annual growth reached 1.9%, the strongest since late 2024, as reported by Reuters.
Resilience in the face of an energy shock
The figures are notable because they cover a period dominated by the conflict in the Middle East. Oil and gas prices have risen sharply since the war began, pushing up fuel costs and household energy bills. Despite that, consumers kept spending and companies kept investing through the summer.
The Bank of England had already pencilled in 0.7% growth for the quarter in its November Monetary Policy Report, so the outcome does not change its view. It now expects the economy to grow by around 1.6% in 2026 as a whole, well above the 1.2% forecast by the Office for Budget Responsibility alongside the Budget on 28 October, which was finalised before the latest revisions.
Why the outlook is more cautious
Strong past data does not guarantee a strong winter. Several warning signs have appeared in more timely indicators:
- Interest rates are rising. The Bank of England raised Bank Rate to 4% on 5 November, its first increase since 2023, and markets expect further tightening.
- Inflation is climbing. CPI reached 3.5% in September and the Bank projects it will approach 5% by mid-2027 as energy costs feed through.
- Households are under pressure. Retail sales volumes fell in September and consumer confidence dropped sharply in the run-up to the Budget.
- Construction is weakening. The 0.7% fall in construction output reflects higher borrowing costs and a slower housing market.
The Bank itself expects growth to slow in the final quarter of 2026 and into 2027, as higher prices, tighter financial conditions and fiscal consolidation weigh on activity.
What it means for London businesses
For firms in the capital, the data confirms that demand has held up better than many feared, particularly in professional, digital and technology services, where London has a large share of UK activity. Companies exposed to AI adoption, software and consultancy are seeing the strongest tailwinds.
The flip side is that cost pressures are building. Energy, borrowing and wage costs are all rising at the same time, so margins are likely to be squeezed even where revenues hold up. Sensible priorities for the months ahead include:
- Reviewing financing arrangements before any further rate rises, including variable-rate loans and overdrafts.
- Stress-testing cash flow against higher energy bills over the winter and into 2027.
- Checking eligibility for the expanded business rates relief announced in the Budget for retail, hospitality and leisure premises.
- Investing selectively in automation and AI tools where they deliver measurable productivity gains, the area where UK growth is currently concentrated.
The bottom line
Britain’s economy entered the autumn in better shape than expected, powered by services and an AI-driven boost to business activity. The question now is whether that momentum can survive higher interest rates and an energy-driven rise in inflation. The next ONS estimate, a revised reading for the quarter, is due on 22 December.
