The UK economy is expected to see a modest 0.5% quarter-on-quarter growth in Q3, according to NIESR. This projection is due to robust activity in services and construction, coupled with supportive fiscal policy despite fragile external conditions.
NIESR notes that negative growth in April and May could benefit Q3 growth figures. However, they caution that the fragility of public finances might lead to fiscal tightening in the Autumn Budget.
Impact Of Policy Uncertainty
The institute warns that ongoing policy uncertainty could negatively impact the outlook for UK debt, posing a risk to their growth estimate. They stress that this is an early prediction, with several variables that could alter the Q3 economic outcome.
We are seeing a short-term positive signal for the UK economy, with a projection of 0.5% growth for the third quarter. This suggests a potential modest uplift for UK-focused assets like the FTSE 100 and the Pound in the coming weeks. Traders might consider this a green light for cautiously optimistic positions.
This outlook is supported by a slowdown in the cooling of the labour market, where we’ve seen unemployment hold steady at 4.4% in the latest figures for the three months to June 2025. The mechanical rebound from a weak April and May also provides a technical tailwind for third-quarter figures. This could favour short-dated call options on UK indices or short-term long positions in GBP/USD, which is currently hovering around 1.28.
However, we must factor in the considerable warnings about the UK’s fragile public finances. With the government likely to announce fiscal tightening in the Autumn Budget, any short-term gains could be quickly erased. The risk of future austerity measures or tax hikes casts a significant shadow over this otherwise positive forecast.
Strategies For Market Volatility
This creates a difficult situation, as the Bank of England’s hands are also tied by inflation that remains sticky, with the last reading for July 2025 coming in at a stubborn 3.5%. Policy uncertainty is therefore high, which typically leads to market volatility. We saw a stark example of this during the market turmoil following the fiscal announcements in late 2022, reminding us how quickly sentiment can turn.
Given the conflict between a decent short-term growth outlook and significant medium-term policy risk, the smart play could be on volatility itself. We should consider strategies that benefit from a large market swing in either direction as we get closer to the Autumn Budget announcements. Implied volatility on FTSE options expiring late in the fourth quarter may still be relatively cheap.
Therefore, the focus in the coming weeks should be on any government commentary regarding the budget and upcoming inflation reports. We should pay close attention to UK Gilt yields, as a sharp rise would signal growing market concern over the country’s debt. These will be the key indicators of which way the market will ultimately break.
