UK Economy Grows 0.7% in Q3, Powered by AI Boom Despite Energy Shock From US-Iran War

Britain's economy expanded by 0.7 per cent in the third quarter, official data showed on Thursday, as spending linked to the AI boom helped offset higher energy prices and other disruptions caused by the US-Iran war.

The Office for National Statistics (ONS) said the July-September reading was an acceleration from 0.5 per cent growth in the second quarter. The figure, in line with market expectations, was the fastest quarterly growth since the first three months of 2024. The ONS said the growth was driven by strength in the services sector, particularly computer programming, which has lifted output throughout the year. "Many of the businesses reporting the largest increases in turnover are involved in activities related to artificial intelligence and cloud computing," it said.

Monthly data showed GDP grew 0.4 per cent in July, stalled in August and expanded 0.2 per cent in September. Ruth Gregory, deputy chief UK economist at Capital Economics, said growth was "unusually concentrated in AI-related sectors." She added that the economy is entering the fourth quarter with more momentum than expected.

The Bank of England last week raised its growth forecasts for this year and next, citing strong business investment tied to AI-related demand. At the same time, it raised its benchmark interest rate for the first time in more than three years as soaring energy costs push up global inflation. Disruptions to Gulf energy supplies from the US-Iran war, along with Ukraine's strikes on Russian refineries, have driven diesel prices to record highs worldwide.

Finance minister John Healey said the Middle East conflict has hit growth worldwide, "yet Britain is showing stand-out resilience."

The Bank of England expects UK inflation to peak at 4.9 per cent in the second quarter of next year in its central forecast. In its worst-case scenario, with oil prices soaring far beyond $100 a barrel, it warned inflation could reach 6.2 per cent in the third quarter of next year, from 3.5 per cent currently. Millions of Britons face higher energy bills from the start of 2027, even after some support offered by the Labour government in last month's budget. Oil prices have eased to around $90 a barrel in recent weeks on hopes of diplomatic talks to end the war.

Kit Rees, investment strategist at wealth management firm Quilter, said the economy continues to show resilience, but there are fears it will lose momentum just as energy-driven inflation keeps pressure on interest rates.