AI helped UK defy expectations – but will economy’s resilience fizzle out?

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Despite John Healey’s defiance, the economy faces threats from a tech slowdown and energy bills this winterAI helps UK economy grow at fastest pace for more than two yearsThe…

Despite John Healey’s defiance, the economy faces threats from a tech slowdown and energy bills this winter

The forecasters were clear when John Healey became chancellor in July: Britain’s resilience to the war in the Middle East would not last. The global economic headwinds were too strong, inflation was beginning to rise and growth would slow to a trickle.

Four months into the job, the economy is continuing to defy expectations after growing by 0.7% in the third quarter – the fastest expansion in two and a half years. It puts the UK on course to be the second-fastest growing G7 economy this year.

On his first day in Downing Street the memo from the Treasury showed the most optimistic City analyst expected 0.3% quarterly growth. Most had pencilled in a figure close to zero. Some were warning that the UK could edge towards a recession.

Despite the gloomy outlook households have continued to spend and business investment has powered ahead, driven by the rollout of AI.

Underneath the bonnet, growth is being spearheaded by IT and professional services – together contributing about half of the rise in activity. As the central sectors in the AI boom, that is hardly surprising – with analysts at ING suggesting the strength in IT was “very clearly a datacentre story” thanks to the UK’s status as a leading destination in Europe for investment.

Overall, Deutsche Bank estimates that AI-related spending has added about 0.3% to 0.4% to GDP growth this year. It is clear to see why Healey is keen to build on the groundwork laid by his immediate predecessor, Rachel Reeves, to harness AI amid government efforts to court global business investment.

Meanwhile, household consumption is up by 1.6% so far this year – helped by spending over the warm summer months even as consumers faced a living standards squeeze because the Iran war fuelled a surge in petrol and diesel prices.

However, the fear is that the UK’s initial resilience to the global economic storm emanating from the Middle East…

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