Economic recovery gathers pace
The UK’s recovery from recession gathered yet more pace in the fourth quarter, new revised figures have shown.
The economy grew by 0.4% between September and December, a small but welcome upward revision from the previous estimate of 0.3%.
The Office for National Statistics attributes the rise to a stronger performance from the services, construction and agriculture sectors. Economists had been expecting the figure to be held at 0.3% for the quarter.
The latest figures also show that, over the course of 2009, the economy contracted by 3.1% rather than 3.3% as previously calculated.
However, economist warn that the figure does not alter forecasts for a slow and bumpy recovery, as the economy received a lot of help in the fourth quarter of 2009 from monetary and fiscal stimulus - which are now starting to be removed.
For example, VAT reverted back to 17.5% from 15% at the end of 2009 while the car scrappage scheme has now ended.
Jonathan Loynes, chief European economist at Capital Economics, explains: “Growth in the fourth quarter was still heavily reliant on public spending and inventories, both areas that are likely to be weaker in coming quarters."
He adds: "Overall, some welcome news but the big picture of a fragile and unbalanced recovery is unchanged.”
Growth may also have moderated in the first quarter of 2010 due to the significant weather-related hit to activity levels, according to Howard Archer, chief UK economist at IHS Global Insight.
“Although some of the lost activity has already been made up, it looks like retail sales will have contracted significantly overall in the first quarter,” he says. “Looking through the weather related distortions to activity in the first few months of 2010, it looks like gradual recovery remains intact. But gradual is the key word."
Archer anticipates growth will hit 1.7% in 2011 – less than the 3% to 3.5% range forecast by the Bank of England and the chancellor in his 2009 Budget.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.