UK GDP drop caused by Jaguar production decline, but services struggle to pick up steam

The UK economy grew by a less than expected 0.1% in the 3 months to September, this is the weakest quarterly rate of growth since Q4 2023, when the economy contracted. It suggests that for all the talk of growth, investment and reform from the government, this has not helped to boost the sustainable growth rate.

The main drag on growth was production, which fell 2% in September. This was due to a near 30% decline in car production, after the Jaguar Land Rover cyber attack halted production. While this is a one-off idiosyncratic issue, Jaguar Land Rover only restarted production  in November, and it is a phased recovery, which means that there could be a further drag from production on growth figures in the coming months, since Jaguar Land Rover is the country’s third largest car producer.

However, the bigger concern for investors is the fact that services and construction were also weaker in Q2 compared to Q3, which suggests that the UK’s sustainable growth rate is deteriorating as we lead up to the Budget.

The sluggish growth in the service sector is to be expected as consumer confidence was in negative territory for most of last quarter. The service sector is the backbone of the UK economy, so if Rachel Reeves does go ahead with her plans to raise income tax for everyone in the Budget, it could have a contractionary effect and hurt the UK economy as we move into 2026.

While the GDP report adds to the reasons to sell the pound that have accumulated in recent weeks, GBP/USD has been fluctuating this morning. After initially selling off sharply, it has since come back, and GBP/USD is now at the highs of the day, trading around $1.3130.

GBP/USD

The GDP report has not moved the dial for interest rate cut expectations; there is still an 86% chance of a cut next month. The labour market data seems to have had a bigger impact on the prospect of a rate cut, and the market could have reached ‘peak cut’ speculation, which may limit downside for the pound in the short term. In the past month, the pound has been the second weakest performer in  the G10 FX space and is lower by more than 1.3% vs. the USD.

We are now in the ‘golden quarter’ for growth, where retail spending is boosted by Black Friday and Christmas. However, the UK consumer may be over-burdened by the potential for higher taxes to do the heavy lifting this year. Thus, it could be a bleak mid-winter for the UK economy.