Services Sector Rebound Expected to Help UK Economy Limp Towards Growth
Chancellor Rachel Reeves is poised to breathe a minor sigh of relief this week as new economic data is anticipated to show the UK economy inched towards growth in December 2025. According to a Bloomberg survey of City economists, the economy is projected to have expanded by 0.1 per cent in December and 0.2 per cent for the fourth quarter overall.
Services Sector Leads the Charge
The services sector, which contributes over 80 per cent of the UK's GDP and is often viewed as the engine of the economy, is broadly expected to drive this expansion. This comes after a turbulent period leading up to the Autumn Budget, which hampered growth at the start of the fourth quarter as businesses delayed investments in anticipation of potential tax changes.
Business activity was significantly impacted by the back-and-forth briefing from the Treasury, with a Purchasing Managers Index (PMI) from S&P indicating that company bosses remained cautious in November, postponing decisions ahead of Reeves' Budget announcement. However, following the late November Budget, which raised taxes by approximately £26 billion, activity is expected to have picked up as firms revived their investment plans.
Robert Wood, chief UK economist at Pantheon Economics, noted that the "broad thrust from activity" in services suggests Budget "uncertainty is already fading quickly." The sector grew by 0.2 per cent in the three months to November, helping to offset a 1.1 per cent contraction in construction and a 0.1 per cent decline in production.
Modest Growth Amid Ongoing Challenges
Economists at the Office for National Statistics (ONS) highlighted that the expansion was "led by" the services sector's rebound after a weak October. Wood pencilled in growth of 0.1 per cent for December but added it could "tip to 0.2 per cent" due to the services boom. In October, amid rampant Budget speculation, the UK economy contracted by 0.1 per cent, with zero movement in services.
While modest growth to round off 2025 will alleviate fears of a quarterly contraction that were heightened after October's data release, sluggish figures continue to raise questions about the pace of Reeves' growth mission, on which she has staked her political reputation.
Jaguar Land Rover Provides Additional Boost
The economy is also expected to receive a modest boost from the recovery of Jaguar Land Rover, which had its production halted after being hit by the costliest cyber attack in UK history, estimated at £1.9 billion. Michael Brown, senior research strategist at Pepperstone, suggested that an end-of-year growth spurt could mark a "mechanical rebound as a result of JLR production resuming post-cyber-attack."
Broader Economic Outlook Remains Glum
Despite the potential for some reprieve for the Treasury this week, the broader economic picture remains concerning. Last month, analysis from Oxford Economics described the growth spurt in the final months of 2025 as "payback" for declines in output over previous months. Andrew Goodwin and Edward Allenby, UK economists at Oxford Economics, stated, "This appears to be noisy data rather than there being any strong underlying narrative."
Additionally, the Bank of England delivered a blow to Reeves during the latest Monetary Policy Committee meeting, cutting its growth forecast for 2026 to 0.9 per cent from 1.2 per cent. This revision was accompanied by a lowered growth estimate for 2025, now at 1.4 per cent down from 1.5 per cent.
Simon French, chief economist at Panmure Liberum, commented, "2026 won't be a vintage year for UK economic performance by historical standards." He added, "The composition of economic growth remains overly reliant on public sector spending and housing wealth."
