The UK economy has surprised economists this year by posting higher growth than expected. Mauricio Alencar looks at whether signs of “good growth” are beginning to appear – and why it’s not feeding through into living standards.

Before coming to power, the Labour Party promised to make the UK the fastest growing economy in the G7. Figures on Thursday morning suggested this pledge has been achieved, and ministers have rushed to take credit.

A year into government, modelled on China’s approach to business, the government published its industrial strategy. New statistics suggest that growth is broadly aligned with Labour’s apparent method of “picking winners” – to the detriment of some industries.

Labour officials had a Star Wars-sounding handle for its designated high-potential sectors: IS-8. It includes advanced manufacturing, clean energy, creative industries, defence, digital and technologies, financial services, life sciences, and professional and business services. 

Critics of the plan argued growth in the economy would not be organic. That, though, appears to be part of the point. Andy Burnham has doubled down his predecessor’s industrial strategy, highlighting the need for “good growth”, as opposed to any growth for the sake of growth. 

It raises the question of whether Whitehall officials tasked with boosting the government’s industrial strategy are also thinking on the kind of growth that ministers don’t want. 

In the last two years, official figures have broadly beaten market expectations. The UK economy accelerated in the third quarter of this year, hitting 0.7 per cent growth, despite predictions that the country was heading for a slowdown. Cue celebratory statements by Treasury ministers including Torsten Bell and Dan Tomlinson. Rachel Reeves, the former Chancellor, also offered her take on Thursday, praising “just how great a turnaround we achieved” in the economy.

But beneath the latest set of data, a more interesting story on the economy has emerged. 

‘It’s more than just AI’

Last week, the Bank of England said about a fifth of UK growth has been generated by AI-related investment. Bloomberg Economics thinks that about a fifth of growth has been driven by the ‘general purpose’ technology. 

But as Deutsche Bank’s Sanjay Raja pointed out, “it’s more than just AI”. 

Official data showed that while growth of about 4.4 per cent in computer programming has helped boost the digital and technologies sector, the UK economy is benefitting from relatively strong performances across other parts of IS-8. 

Legal and accounting, for instance, grew by 2.3 per cent in the last quarter. Since the 2024 election, the industry has added over £2bn in value to the economy. Some economists have suggested that added tax speculation before recent budgets have had upsides on growth in services after all, even it rumours cost the economy in other ways by prompting business owners to sell assets or pensioners to withdraw cash prematurely.

It’s not just professional and business services reaping the benefits of a government ready to back specific sectors. The creative, arts and entertainment industry is up 15.2 per cent since the election, pharmaceuticals is up by a similar proportion, and electricity-related components have also lifted the wider production sector average. 

Meanwhile, the financial services sector is among the biggest contributors to growth in absolute terms, adding more than £1bn to the economy since 2024. 

Perhaps most emphatically of all, aircraft and spacecraft repair – one of the finer sub-industries monitored by the ONS – has grown by 29.9 per cent, while aerospace manufacturing and ship and boat building have also enjoyed a boost since Labour took power. This would surely please Chancellor John Healey, who has staked his economic agenda on making the defence sector contribute more substantially on economic growth. 

What ‘good growth’ means for some

Equally significant, however, are the sectors which have suffered under Labour. Gambling and betting is one of the worst performing services sectors in the UK economy, after being hit with new taxes in Rachel Reeves’ 2025 Budget. 

Labour’s net zero sprint is also hitting oil and gas extraction, which has been one of the biggest losers of the government in the last two years. Refined petroleum and petrochemicals industries have declined. Criticism around the farming tax has also seemed to hit the agriculture sector, which has fallen slightly year-on-year. 

But areas of the economy, which are crucial politically speaking, appear to have been overlooked. 

Most devastatingly for the governing party, construction has faltered, with the value added to the economy shrinking since 2024 despite a manifesto pledge to build 1.5m homes. Related industries such as cement and concrete manufacturing or real estate activities have struggled too. A struggling construction industry could also put Labour’s public infrastructure drive at risk. 

Then there are industries that Burnham has taken a more active interest in fixing. Sewerage services plus food and beverage services, which covers hospitality and retail, have been among the biggest drags on growth, according to official statistics. Burnham has made both central pillars of his premiership with pledges to re-design the ownership of water companies and revive the high street. 

There may also be looming threats for a government that talks up the need to build “resilience”. Clothing production is down by about 16 per cent since the election while security and investigation activity, which is crucial to financial due diligence or clamping down on crime, has also fallen by significant levels.  And even as the government hailed its trade deal for carmakers with the US following the introduction of President Trump’s tariffs, the motor vehicles industry has also shrunk, in part due to the near-halting of production as Jaguar Land Rover last year.

The Bank of England’s Andrew Bailey has warned that growth was not as broad-based as headline figures would suggest. Perhaps that is partly by design. Some analysts have suggested that government consumption “stands out” as it has far exceeded forecasts. The public sector has expanded in the last two years, raising questions on how organic growth actually is.

Nevertheless, economists such as Peel Hunt’s Kallum Pickering have noted that “resilience is real” as consumer spending remained higher than expected. Yet another test for the economy is looming with higher inflation in the winter and continued rise in energy prices. ING’s James Smith also warned that professional services firms may yet see momentum fade. It’s perhaps only after 2027 whether commentators will see whether Burnham’s “good growth” pledge survives storms ahead.