UK Economy Grows 0.7% in Q3 as AI Spending Beats Forecasts
Britain's economy grew 0.7% in the third quarter, its fastest pace in two and a half years, driven by AI-related investment. Forecasters had expected near-zero growth. Chancellor John Healey now faces a possible tech slowdown and a jump in household energy bills this winter.
The UK economy grew 0.7% in the third quarter of 2026, its fastest expansion in two and a half years, as AI-driven investment helped defy expectations of a slowdown, according to official figures.
The result puts Britain on course to be the second-fastest growing economy in the G7 group of rich nations this year.
Forecasters got it wrong
When John Healey became chancellor in July, the Treasury memo on his first day in Downing Street showed the most optimistic City analyst expecting 0.3% quarterly growth. Most had pencilled in a figure close to zero. Some warned the UK could edge toward recession.
The forecasters had said Britain's resilience to the war in the Middle East would not last. Inflation was starting to rise and global headwinds looked too strong.
What drove the growth
Information technology and professional services together contributed about half of the rise in activity. Analysts at ING said the strength in IT was "very clearly a datacentre story", reflecting the UK's status as a leading destination in Europe for such investment.
Deutsche Bank estimates AI-related spending has added about 0.3% to 0.4% to GDP growth this year.
Households helped too. Consumption is up 1.6% so far this year, supported by spending over the warm summer months, even as the Iran war pushed up petrol and diesel prices.
Risks ahead
Analysts fear that resilience will fade. Financial markets have been rocked in recent weeks by worries that a bubble in AI stocks could burst, following the US midterm elections and revelations at chipmaker Nvidia. A slowdown in tech investment could hit the UK.
Households face a tougher winter. Energy bills are poised to rise by about a quarter in January, taking the average annual gas and electricity bill above £2,000.
The latest data already show early warning signs. Retail sales and consumer discretionary spending fell in September, and real wage growth is cooling. Headline inflation is on track to reach a fresh peak of close to 5% next year.
Strong growth may also embolden the Bank of England to raise interest rates to fight imported inflation. City investors expect at least two more quarter-point increases, to 4.5%, before the end of next year. That would slow the economy and add to the squeeze on living costs.
At last month's budget, Healey struck a defiant tone, arguing that the UK could keep defying forecasters' expectations. That task is becoming harder.
