UK growth driven by AI spending while households remain cautious
The UK economy has just delivered its strongest growth in more than two years, with real GDP increasing by 0.7% between July and September.
This stronger-than-expected growth reported by the Office for National Statistics (ONS) comes despite global pressures on energy prices due to the conflict in Iran affecting shipping through the Strait of Hormuz and the ongoing conflict in Ukraine.
It is possible this growth could have been more significant if it were not for international pressures on the local economy, but the figures were welcomed by Prime Minister Andy Burnham.
“This is welcome news. Despite a year where events around the world have pushed up costs here at home, our economy is growing, bringing hope for the future,” Burnham said.
“Our job now is to keep focused on what matters to people: bringing down bills, creating good jobs, helping high streets thrive, and backing businesses to grow.”
“There is more to do, but we have a clear direction. Giving people breathing space now while making the long-term changes needed to deliver good growth in every part of Britain,” he said.
A divergence beneath the numbers
While the growth figures look good on paper, the prospective is not necessarily as promising considering the cause of this growth, according to analysis by KMPG UK.
KMPG Vice Chair and Chief Economist Yael Selfin said the growth figures mostly reflect increased business spending on AI adoption, not necessarily confidence in household spending, adding that they expect growth to falter in the fourth quarter of the year.
Household spending was subdued in the third quarte as elevated interest rates and rising unemployment expectations took their toll. On the other hand, business investment and AI spending were the biggest growth drivers in the UK’s service industry.
“The UK economy delivered another solid quarter of growth, but beneath the headline numbers lies a clear divergence,” Selfin said.
“Households remain cautious as higher inflation and interest rates constrain spending, while businesses are investing strongly in AI and automation.”
“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.
“The Bank of England is likely to raise rates again, probably in December, to defend against inflation risks.”
