Why the UK’s growth is worse than you think it is

The latest quarterly national accounts showed few changes to recent UK economic history, with Q3 GDP growth unchanged at 0.1% quarter-on-quarter. The Q3 expenditure breakdown was slightly more positive, but the bigger picture remains one of an economy heavily dependent on the public sector to drive GDP growth.

While the government’s spending plans suggest a further significant contribution to growth from the public sector in 2026, the private sector outlook remains weak.

Households face a sharp slowdown in real income growth, and corporate profitability is muted. Given tight policy settings, 2026 will likely be another year of sluggish growth for the UK economy.

“The quarterly national accounts left Q3 GDP growth unrevised at 0.1% quarter-on-quarter, and very small revisions to prior quarters essentially left the bigger picture unchanged,” said Matt Swannell, Chief Economic Advisor to the EY ITEM Club.

“The expenditure breakdown was slightly more encouraging than before, with consumer spending growth now marginally higher in Q3 and a string of upward revisions leaving the recent performance of business investment looking much healthier.”

However, looking at the past few years, it is evident that growth has relied heavily on the public sector. UK GDP has increased by 2.4% since the end of 2022, with government consumption and investment contributing 1.7ppts, Swannell said.

“Current spending plans should sustain the public sector’s significant role in 2026, but the absence of a sustainable growth driver remains a problem for the UK economy.

“The outlook for the private sector remains subdued. Real household income growth is now slowing sharply, and although the household saving ratio decreased in Q3, it remains high compared to historical standards. Corporate profitability was a smaller share of Gross Value Added (GVA) in Q3 than at any point since 2007. This, coupled with fragile confidence, implies that the recent improvement in business investment may not be sustainable.

“Given that fiscal policy is tightening and the effects of borrowers refinancing cheap fixed-rate mortgages will more than offset cuts to Bank Rate, another year of sluggish growth for the UK economy is expected in 2026.”

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