The UK's Engine Stalled

The ONS released its Q4 2025 GDP estimate this morning. The headline was +0.1%. But the detail matters more.

Services growth: 0.0%

Services account for roughly 80% of UK economic output. In Q4 2025, the sector flatlined — its worst quarter since Q4 2023, when GDP actually contracted. The headline GDP figure was +0.1%, but that was held up almost entirely by government spending. The part of the economy that actually drives growth didn't grow at all.

Services stalled — and the weak spot matters

Eight of fourteen services subsectors grew on average ~0.5%. But the drag came from one place in particular: professional, scientific and technical services fell 1.1% — the second consecutive quarter of decline.

This subsector covers legal, accounting, consulting, and architecture — the services businesses buy when they're planning to invest, expand, or restructure. A contraction here reflects businesses pulling back on decisions, not just pulling back on spending. It tends to be a forward-looking signal and it’s a big part of the UK economy at ~9% of GDP.

While AI is part of the picture here, the more likely primary driver is the investment environment. Business investment fell 2.7%. With rates still elevated and confidence weak, the incentive to delay major decisions — and the advisory work that follows — is strong.

Production's rebound is misleading

Production rose 1.2% but that was a rebound from Q3's -0.7%, caused by a cyberattack on Jaguar Land Rover in Q3, not new growth. Manufacturing across 2025 as a whole shrank 0.2%. The underlying picture hasn't changed.

Construction contracted sharply

Construction was down 2.1% — the steepest fall since early 2024. Private housing new work fell 3.6%. Mortgage rates remain elevated and planning reforms haven't translated into building yet. Construction was the strongest sector in mid-2025. That momentum has reversed.

Business investment went backwards

Down 2.7% after +1.6% in Q3. The quarterly pattern — +4.9%, -1.8%, +1.6%, -2.7% — is volatile, but the trend is downward. NICs increased in April. The KPMG/REC data shows recruitment falling at historically rapid rates. The picture is one of businesses waiting — for lower rates, for clearer policy signals, for more confidence that the investment will pay off.

What the table shows: The services column tells the story: 0.6% → 0.2% → 0.2% → 0.0%. Steady deceleration all year. Construction went from strongest performer in mid-2025 (+1.4%) to weakest (-2.1%). Production's Q4 bounce is a one-off recovery, not a trend.

Services is ~80% of output. Construction is ~6%, but disproportionately important as a multiplier for jobs, materials, and local spending. Production is ~13% and too volatile to carry anything. If services isn't growing and construction is contracting, the economy cannot meaningfully grow.

This is a business investment problem. Rates at ~4% make it expensive to borrow, build, and expand. When businesses don't invest, they don't hire advisors, don't start construction projects, and growth stalls. The BoE is caught between above-target inflation and an economy losing momentum. This should change in Q2 when one-off policy effects from April 2025 fall-out, bringing inflation back to target — according to the BOE’s own forecasts. But until then expect the economy to limp along, unless the BoE acts early.

Confidence is self-reinforcing. Businesses aren't investing because conditions feel uncertain. Conditions feel uncertain partly because businesses aren't investing. Six months of policy turbulence — the Budget, employer NICs, shifting signals — has compounded this. If you can invest or hire counter-cyclically, there's less competition for talent and professional services right now than there has been in some time.

The professional services pipeline is thin but probably cyclical. Two quarters of contraction in legal, consulting, and accounting is significant. But it tracks the investment cycle more than a permanent structural shift. AI is reshaping parts of the sector at junior levels, but the immediate pressure is clients deferring decisions. Plan for a thin Q1, but expect it to recover as rates come down and the political picture settles — whenever that is.

Germany outgrew the UK in Q4. Germany — with its well-documented industrial slowdown, its energy cost burden, its coalition uncertainty — posted 0.3% growth. Context matters: Germany's Q4 follows a contraction in Q2 and stagnation in Q3, so this is partly a bounce from a low base. But for a country that spent much of 2024 comparing itself favourably to its European peers, that comparison has quietly reversed.