UK Economy Growth Hits 0.7% as AI Investment Drives GDP Despite Inflation Pressures

The UK economy accelerated in the third quarter, with gross domestic product (GDP) rising 0.7% as growth in the services sector was supported by increased activity among AI-linked businesses, according to figures from the Office for National Statistics (ONS). The rise marked the strongest quarterly growth since the first three months of 2024.

UK Economy Growth Lifted by AI-Linked Activity

The latest figures showed economic expansion was faster than the previous quarter, when GDP grew by 0.5% between April and June. ONS chief economist Grant Fitzner said the increase was almost entirely driven by strong and widespread growth in the services sector, with computer programming recording its fastest growth in three years.

'The economy grew robustly in the third quarter almost entirely due to strong and widespread growth in the services sector,' Fitzner said. He added that there was continued evidence that AI-linked businesses had helped boost the sector.

The ONS data showed computer programming, consultancy and related activities rose by 4.4%, making it the largest driver of GDP growth across 2026 so far. The figures also indicated that many businesses reporting higher turnover were involved in activities linked to AI and cloud computing.

The figures highlighted a contrast between strong business investment in technology and continued pressure on household spending from higher prices. While the latest growth figures offered a positive signal for the economy, economists warned that inflation and borrowing costs could continue to weigh on demand.

KPMG chief economist Yael Selfin said businesses were pushing ahead with AI and automation investment while consumers remained cautious because of inflation and interest rate pressures.

'Households remain cautious as higher inflation and interest rates constrain spending, while businesses are investing strongly in AI and automation,' Selfin said.

UK Economy Growth Faces Inflation and Energy Challenges

The stronger GDP performance came despite rising energy costs linked to global conflicts. GDP growth slowed to 0.2% in September, as higher fuel costs linked to tensions in the Middle East and the Russia-Ukraine war added pressure to the economy.

Energy pressures are expected to remain a concern heading into winter, with higher wholesale gas prices adding to pressure on businesses and households. Rising borrowing costs have also continued to affect spending decisions.

John Healey welcomed the figures, saying Britain had shown resilience despite global economic challenges.

'The Middle East conflict has hit growth worldwide, yet Britain is showing stand-out resilience,' Healey said. He added that the government was backing investment, innovation and fast-growth businesses.

However, Selfin warned that the momentum may not continue at the same pace. She said the economy could lose strength in the final quarter as higher energy prices, inflation and interest rates weigh on households.

'We expect the economy to lose momentum in the fourth quarter and broadly flatline as higher energy prices and interest rates dampen consumer demand,' she said.

Households covered by the energy price cap already faced a 4% increase in October, with EDF predicting that average household energy bills could rise above £440 from January.

Some low-income households received support announced in last month's budget to help cushion the impact of rising costs. However, the severity of the energy shock has added to concerns in financial markets, with data from the London Stock Exchange Group suggesting investors were pricing in the possibility of two further interest rate increases by March next year.