Emeritus Professor Joe Nellis is Head of Economic Research at MHA, the accountancy and advisory firm.

The UK economy has proved more resilient than many feared just a few months ago, growing by 0.7% in Q3 following growth of 0.5% in Q2.

The economy is now 1.9% larger than it was a year ago, an improvement in the annual growth of 1.4% in the previous quarter.

This is a significant uplift and suggests that momentum is being maintained rather than fading as we head into the winter.

The improvement has been driven largely by the private sector. Business investment has held up well, helped in part by AI-related spending, while consumer spending has been supported by solid retail sales and a modest pickup in real incomes earlier in the year. Unlike the years between 2022 and 2025, when government spending propped up the economy, this year's resilience has come mainly from businesses and consumers.

Unless the economy contracts significantly in Q4, growth across 2026 will beat the OBR's forecast last month of 1.2%.

This improvement will be a relief to the Chancellor, but it also strengthens the case for further interest rate rises.

The MPC voted to raise Bank Rate to 4% last week, the first increase in three years.

The decision was driven by rising inflation linked to higher energy prices, but stronger-than-expected activity convinced them that tighter monetary policy would not bring the economy to a standstill. Another rise in interest rates before Christmas therefore cannot be ruled out.

Unfortunately, the outlook for the year ahead is less positive. Inflation rose to 3.5% in September and the Bank of England expects it to climb as high as 5% by the middle of 2027. The main driver will be external factors resulting from higher energy costs linked to the Middle East conflict. Without a timely resolution to the conflict, higher inflationary pressures and higher borrowing costs will put pressure on hard-pressed household budgets and strain business confidence just as the current momentum starts to wane.

The OBR has already announced that it expects the pace of recovery to slow down, cutting its 2027 growth forecast from 1.6% to 1%. There are also concerns that a continued sell-off in AI-exposed stocks could undo the technology's boost to the UK economy.

This latest upturn in GDP growth has implications for public sector finances. On the one hand, stronger growth will boost tax receipts, while on the other hand higher interest rates will push up the cost of servicing the national debt. Given that the Chancellor has left himself with only £15 billion of headroom after the Budget, he will have very little room for manoeuvre if the economy faces any more unforeseen shocks.

The UK economy is heading towards the end of a challenging year with renewed vigour. But unless the high cost of energy starts to recede, momentum is likely to fade quickly as inflation and interest rates bite in 2027.