UK economy powers on through third quarter but the headwinds are building
Lead — The UK economy has shown resilience through the third quarter, with GDP growth pegged at a robust 0.7% quarter-on-quarter, although emerging headwinds related to rising inflation could temper future growth. Per the full note from ING, the impressive performance has been largely driven by the IT and professional services sectors, despite some signs of weakness in September. With no immediate high-impact events on the calendar, traders should keep an eye on the unfolding fiscal landscape and its effects on the GBP against key peers while monitoring the potential for a slowdown in advance of the winter months.
What the desk is arguing
The desk argues that the UK's economic momentum, highlighted by a 0.7% rise in GDP for the third quarter, faces growing challenges as inflation begins to rise. Per the full note from ING, despite the current strength, the anticipated slowdown could significantly alter the growth narrative in the coming months.
Support for this outlook derives from the noteworthy performance of the IT and professional services sectors, which have benefited from data center investments and a push in R&D linked to AI developments. However, the softening in output as observed in September suggests a potential cooling, raising questions about sustainability in these sectors.
Where it sits in our coverage
Our consensus target for GBP/USD sits at 1.075, with a range indicating sentiment that can be as low as 1.04 and as high as 1.12. Specifically:
This view generally aligns with jpmorgan but is more optimistic compared to bofa, which anticipates a more cautious approach due to prevailing economic risks. This positioning could suggest that traders expect fluctuations within the current range.
How other firms see it
Firms like jpmorgan and several others share a bullish outlook on the GBP, reflecting confidence in the 'data center story' and R&D impacts. Conversely, bofa presents a more cautious stance, highlighting risks due to inflationary pressures and potential economic cooling.
The GBP/USD trajectory will likely be influenced by UK inflation trends and potential responses from the Bank of England, alongside wider market dynamics related to data investments and technological advancements.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK GDP grew by 0.7% in Q3 2026, underlining economic resilience.
- 02Inflationary pressures are becoming more pronounced, posing risks to future growth.
- 03Investment in IT and professional services remains a key driver despite recent weakness.
- 04Market consensus varies from cautious to optimistic regarding GBP performance.
Market implications
Watch for levels around 1.075 for potential shifts in sentiment, especially as inflationary data continues to emerge. The stability of the growth narrative into the winter months could also reshape positioning in GBP trades.
Risks to this view
A significant rise in inflation or unexpected monetary policy shifts from the Bank of England could invalidate the current bullish call, leading to a reevaluation of growth expectations and consequent adjustments in GBP positioning.
Older quick take Quick take Published 08:03 United Kingdom Translate UK economy powers on through third quarter but the headwinds are building The UK economy has had a remarkable run through 2026 and as of September, there was little sign of that coming to an end. But with inflation on the rise, growth is likely to slow through the winter A new Amazon data centre site in Buckinghamshire. Data centre investment has been a key contributor to UK growth this year.
Third-quarter GDP rose by a massive 0.7% quarter-on-quarter. But why has the economy been so strong? A lot of it can be traced back to IT and professional services – sectors that have grown rapidly this year despite shedding staff.
IT is very clearly a data centre story; the UK is one of the leading destinations for investment in Europe. And while output here actually fell through August and September, we expect this to remain an area of outperformance in 2027. Investment in “other buildings” – which we see largely as a euphemism for data centre and green energy capex – has been a strong contributor to overall investment this year, even if it was slightly weaker in 3Q.
Professional services is more of a puzzle. AI is undoubtedly part of the story here, too. Strength in R&D is the most obvious example of the global AI push.
But we’re sceptical that it tells the whole story. We’ve seen a lot of strength in legal services – which we understand from the ONS has been driven heavily by solicitors – together with advertising and accounting. These are not all necessarily obvious places for AI to show up – either in terms of business related to AI development, or AI productivity gains.
All of these industries were also much weaker in September, which could be an early hint that this year’s stunning rise is fading. IT and professional services have been key drivers this year Source: Macrobond, ING "> Source: Macrobond, ING Still, in year-on-year terms, these two sectors are contributing half of growth in UK activity, despite only making up 14% of output. We think this helps explain why the UK has defied the strong seasonal pattern witnessed from 2022-2025, where the economy had been much stronger in the first half of the year than the second.
But this sectoral resilience isn’t the only thing going on. Consumer spending has undoubtedly held up better than expected. It grew by 0.6% in 3Q overall.
Yet we saw in the 2022 energy crisis that the pressure on spending didn’t properly show through until early 2023. The strong spike in natural gas prices is relatively recent. And with utility bills now almost certain to rise by circa 25% in January, it’s hard to see how household spending doesn’t come under greater pressure into the new year.
The UK economy defied seasonal weakness seen through H2 from 2022-25 Source: Macrobond, ING "> Source: Macrobond, ING For the Bank of England, the strength in GDP this year is evidently beginning to play a bigger role in its decision-making. It’s one of the reasons we expect another rate hike in February. But despite this economic resilience, there are still clear signs that monetary policy is having a restrictive effect.
Construction work on new projects is down more than 7% since mid-2025. Private housebuilding is down 30% from its 2022 high and is continuing to fall. This is a sector that is highly sensitive to interest rates.
UK interest rates were already restrictive before the recent rate hike – and will only become more so. That’s why, if we’re right that inflation starts to look less problematic by next summer, we think the Bank is likely to return to rate cuts before the end of 2027 – or early 2028 at the latest. United Kingdom Growth GDP Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives.
The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author James Smith Developed Markets Economist, UK Older quick take
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