UK economy grows 0.8%

26 October 2010

The UK's economy grew twice as fast as expected between July and September, official figures showed today.  

The 0.8% rise flew in the face of analysts' predictions of a 0.4% rise. It will also reduce the likelihood of more quantitative easing from the Bank of England.

The GDP figures released by the Office for National Statistics cover the three months to the end of September and follow 1.2% growth in the second quarter of the year.

However, growth is still expected to slow next year as government spending cuts bite, value-added tax rises and the rebound in construction activity is likely to wane.

On the year, GDP grew by 2.8% which is the fastest annual rate in three years and up from 1.7% in the previous quarter.

The statistics office said the third quarter was the first this year not to have been distorted by weather-related effects which depressed output in the first quarter and boosted it in the second.

Confidence in the manufacturing and services sectors has dropped due to concerns surrounding the impact of the spending cuts and weaker-than-expected retail sales figures for September have added to the concerns, with sales slipping 0.2%.

"The upside surprise came both from construction output, which jumped by another 4% after Q2's 9.5% rise, and services, which registered another solid 0.6% gain despite signs of a slowdown in the survey evidence," said Capital Economics' chief European economist Jonathan Loynes.

He adds these numbers will "clearly ease near-term concerns over a possible double-dip in the UK economy and suggest that GDP growth this year will be a bit stronger than our previous forecast of 1.5".

"Nonetheless, we do not think that they transform the outlook of a pretty weak recovery once the full effects of the fiscal squeeze kick in next year and beyond. As such, we still think that the economy will need more support from monetary policy, probably early next year," concluds Loynes.

But Howard Archer, chief UK and European economist at IHS Global Insight, was more cautious: "While the data suggests that the economy had more momentum than thought in the third quarter, it does not fundamentally change our view that growth will be markedly slower going forward as economic activity is pressurized by major fiscal tightening increasingly kicking in, persistently tight credit conditions, slower global growth and significant constraints on consumers.

"Indeed, we still expect growth to slow to 0.4% quarter-on-quarter in the fourth quarter and then to edge lower still in the first half of next year.

"The resilience of GDP growth in the third quarter appears to put any revivial of quantitative easing by the Bank of England on the back burner for now at least. However, it remains a serious possibility should growth slow markedly over the coming months."

Archer also says he expects "interest rates to stay down at 0.5% until at least late-2011".

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