By Suban Abdulla and David Milliken
LONDON, Nov 12 (Reuters) - Britain's economy grew at the fastest rate in two-and-a-half years in the third quarter of 2026, helped by investment in artificial intelligence,
extending a strong first half and defying predictions of a slowdown made after the Iran war began.
Gross domestic product grew 0.7% in the July-to-September period, up from growth of 0.5% in the second quarter and the strongest calendar-quarter expansion since the first quarter of 2024, the Office for National Statistics said on Thursday.
The annual growth rate picked up to 1.9% in the third quarter, the strongest reading since the fourth quarter of 2024, while on a rolling three-month basis, growth was the fastest since May.
While the quarterly growth rates were in line with economists' expectations in a Reuters poll, in September alone output climbed 0.2%, bucking expectations for unchanged output on the month.
"Something is stirring: monthly GDP beat consensus for the fifth straight month and the seventh in eight," said Rob Wood, chief UK economist at Pantheon Macroeconomics, adding that the data strengthened the chances of another Bank of England rate hike next month.
British growth in the third quarter was the second-fastest in the Group of Seven advanced economies, just behind the United States. So far this year, growth has been the strongest since 2017, excluding the post-pandemic rebound.
The ONS said there was "widespread strength in industries which may be related to artificial intelligence".
Computer programming, consultancy and related activity made the largest single contribution to growth in the third quarter, while computer manufacturing made the biggest contribution to industrial production, up 4.6% in the three months to September.
ECONOMY DEFIES HEADWINDS
Britain's economy has shown surprising resilience in the first half of 2026 after expanding by 0.6% in the first quarter.
While some economists expect slower growth in the final quarter of the year as higher energy prices and borrowing costs weigh on activity, the Bank of England last week upgraded its growth projection for 2026 alongside increasing interest rates.
The BoE now expects GDP to expand 1.6% this year, much stronger than the 1.2% forecast by the government's Office for Budget Responsibility after finance minister John Healey's October 28 budget which did not factor in some recent stronger GDP data and upward revisions to past numbers.
The central bank attributed some of the strength to spending on AI and a small, temporary boost from Healey's fiscal plan.
"While the UK economy has been relatively resilient since the conflict started, that strength will be tested in the months ahead," said Scott Gardner, investment strategist at J.P. Morgan Personal Investing.
"Nervousness in the lead up to the Autumn Budget and continued uncertainty from the Middle East war is expected to weigh on confidence and activity over the coming GDP readings."
There have been some recent signs of weakening consumer and business demand in the face of prolonged high energy prices and rising interest rates.
Official data showed a fall in retail sales volumes in September and consumer confidence suffered its sharpest month-on-month fall since April 2020 before the budget.
FULL IMPACT OF ENERGY SHOCK YET TO COME
While Prime Minister Andy Burnham and Healey welcomed the data, it is likely to increase pressure on the BoE to raise interest rates again.
The central bank warned last week that inflation will near 5% in 2027, and investors see a 73% chance of a back-to-back hike in December after November's increase and two or possibly three more moves next year.
"With growth and inflation both strong, we are comfortable expecting at least two more MPC (Monetary Policy Committee) hikes. Today's figures, at the margin, make a December hike more likely," Pantheon's Wood said.
Britain's government has offered limited support to help families absorb the financial impact of the energy price shock.
Although a recent fall in oil prices might lower petrol prices, household gas and electricity bills are still set to rise by about 25% when the country's energy price cap changes in January.
The ONS said business investment grew just 0.4% on the quarter, half economists' expectations in a Reuters poll and the weakest growth since the start of the year.
(Reporting by Suban Abdulla; Editing by Kate Holton and Emelia Sithole-Matarise)
