Services sector rebound expected to help economy limp towards growth
Rachel Reeves is set to breathe a minor sigh of relief at the sight of new economic data this week with the UK economy expected to have limped towards growth in December.
A survey of City economists by Bloomberg had projected a 0.1 per cent expansion in December and 0.2 per cent for the fourth-quarter.
The services sector – often viewed as the engine of the economy contributing to over 80 per cent of GDP – is broadly expected to lead the expansion.
It comes after a chaotic road to the Autumn Budget hammered growth at the beginning of the fourth-quarter as firms held off on investments as they braced for any tax raids.
Business activity was hit from the back-and-forth briefing bonanza from the Treasury with a Purchasing Managers Index (PMI) from S&P showing bosses were still kept on edge in November with a delay on decision making ahead of Reeves’ Budget.
But following November’s late Budget – where taxes were raised to the tune of £26bn – activity is expected to have picked up as firms dusted down investment plans.
Robert Wood, chief UK economist at Pantheon Economics, said the “broad thrust from activity” in services indicates Budget “uncertainty is already fading quickly”.
The sector grew 0.2 per cent in the three months to November, helping offset a 1.1 per cent contraction in construction and 0.1 per cent in production. Economists at the Office for National Statistics (ONS) said the expansion was “led by” the services sector’s rebound after a weak October.
Wood pencilled in growth for December 0.1 per cent but added it could “tip to 0.2 per cent” as a result of the services boom.
In October, as Budget speculation ran rife, the UK economy contracted 0.1 per cent amid zero movement in services. Though modest growth to round off 2025 will quell fears of a quarterly contraction that were heightened after October’s release, sluggish figures will continue to raise questions around the pace of Reeves’ growth mission, which she has staked her political reputation on.
Jaguar Land Rover to rev up economy production
The economy is also expected to be handed a modest boost from the recovery of Jaguar Land Rover – which had production halted after being hit with the costliest cyber attack in UK history at £1.9bn.
Michael Brown, senior research strategist at Pepperstone, said an end of year growth spurt could mark a “mechanical rebound as a result of JLR production resuming post-cyber-attack”.
Whilst the Treasury may be handed some reprieve on Thursday, the bigger picture remains glum.
Last month, Oxford Economics analysis said the growth spurt in the final months of 2025 was “payback” for declines in output over previous months.
“This appears to be noisy data rather than there being any strong underlying narrative,” Oxford Economics UK economists Andrew Goodwin and Edward Allenby said.
The Bank of England also handed Reeves a blow during the Monetary Policy Committee’s latest meeting where they cut their growth forecast for 2026 to 0.9 per cent from 1.2 per cent.
This also came alongside a revised growth estimate for 2025 of 1.4 per cent, from the previous 1.5 per cent.
Simon French, chief economist at Panmure Liberum, said: “2026 won’t be a vintage year for UK economic performance by historical standards.”
“The composition of economic growth remains overly reliant on public sector spending, and housing wealth.”