Q3 25 UK GDP: A Dismal Quarter With Worse Still To Come

In the third quarter, the economy grew by a meagre 0.1% QoQ, below both market expectations, and the BoE's forecast, of 0.2% growth, which, in turn, makes it the fourth quarter in the last five where the economy has failed to grow by more than 0.3%, with UK Plc having, for all intents and purposes, flat-lined over the last fifteen months or so.

In terms of the components of the release, growth in the third quarter was driven primarily by the services and construction sectors, with manufacturing acting as a significant drag on the economy, where output fell by 0.5% QoQ. Once again, however, overall business investment fell during the quarter, by 0.3% QoQ, a dismal sign indicating a severe lack of confidence in the outlook for the economy moving forwards. 

Looking ahead, risks to growth tilt rather obviously to the downside into year-end. Not only has the 12-week long Budget run-up, and associated rumour mill going into overdrive, created a considerable degree of uncertainty which will act as a stiff headwind through the autumn months, the post-Budget reality of a substantially tighter fiscal policy is likely to pose a chunky headwind too, most notably to consumption growth, if what seems a near-certain rise in the basic rate of income tax does indeed prove to be delivered on 26th November.

For the Bank of England, policymakers are unlikely to place too much weight on today's data, which is of course rather stale and backwards-looking. That said, with the MPC believing that the inflation peak is now in, and with slack emerging in the labour market at a worrying rate, a 25bp Bank Rate cut at the December meeting now seems to be a done deal. That, hence, is now the base case, barring any surprises in the October or November inflation reports, with such a cut likely to be followed by another at the next meeting in February, as the economy makes further disinflationary progress, allowing policymakers' to pivot somewhat more dovishly, in an aim to support an ailing UK economy.