The UK economy barely expanded in the third quarter and slipped in September, sharpening the focus on Chancellor Rachel Reeves’ tax-tilted budget later this month and complicating the Bank of England’s year-end policy calculus.

Headline prints

• Q3 GDP: +0.1% q/q (vs. +0.3% in Q2), signalling a loss of momentum into autumn.
• September GDP (m/m): −0.1%, softer than August’s flat reading, pointing to a weak handoff into Q4.
• Annual pace (September): +1.3% y/y, revised a touch below the prior +1.4%.

Fiscal cross-currents

Reeves has flagged a “difficult” budget and indicated she may revisit campaign pledges not to raise income tax, national insurance, or VAT, arguing that sticking rigidly to those promises would force sharp cuts to capital spending. With fiscal headroom squeezed by downgraded productivity assumptions from the OBR, lingering global conflicts, and tariff-related uncertainty, the Chancellor is weighing both tax rises and spending measures.

• Despite roughly £40bn in tax hikes in last year’s first budget, estimates from the IFS suggest a ~£22bn gap remains to meet the rule of balancing day-to-day spending with revenues by decade’s end.

Monetary policy implications

The growth wobble meets a labour market that has cooled and pay growth that is edging lower—conditions that could nudge the BoE toward support. The Bank held Bank Rate at 4.0% at its last meeting, but it was a tight 5–4 vote, with four members favouring a 25 bp cut.

• A tax-raising budget would act as a fiscal drag, potentially tightening overall financial conditions and strengthening the case for an offsetting monetary ease—provided inflation progress is not jeopardized.
• Conversely, any sizable capital-spending restraint risks weighing further on medium-term supply and productivity, complicating the BoE’s trade-off if price pressures re-emerge.

The market lens

For gilts, weaker growth and the prospect of fiscal consolidation argue for bullish duration near term, unless tax measures stoke risk premia. For sterling, a dovish BoE repricing is a headwind, though credibility around medium-term fiscal repair could partially cushion FX downside. UK equities may see domestic cyclicals benefit if rates fall, but a slower demand backdrop and potential tax headwinds temper the outlook.