Oct 26, 2010

British economy grows twice marking 2.8% GDP increase

Britain's economy grew twice as fast as expected in the third quarter of this year, easing fears the recovery is tripping out and lowering the chance of more quantitative easing from the Bank of England.

On the year, gross domestic product (GDP) grew by 2.8 percent, the fastest annual rate in three years and up from 1.7 percent in the previous quarter.


British finance minister George Osborne said the figures gave him confidence that a steady recovery was underway, although economists maintained a sharp slowdown next year looked inevitable.

The Office for National Statistics said the economy grew 0.8 percent between July and September, down from a nine-year high of 1.2 percent in the second quarter but at the very top end of economists' forecasts.

Sterling jumped against the dollar and the euro and gilts hit a one-month low as investors reckoned BoE policymakers would struggle to make the case for more monetary stimulus next month, even if growth is expected to slow sharply at the start of 2011.

"It's much stronger than expected," said Alan Clarke, UK economist at BNP Paribas. "It certainly makes it challenging for the Monetary Policy Committee to deliver (more) quantitative easing as early as the November meeting."

In political terms, the main opposition criticism of the spending cuts has been that they go too far too fast and may cripple growth going forward.

Credit rating agency Standard & Poor's on Tuesday raised its outlook on Britain's triple-A credit rating to 'stable' from 'negative', saying the spending review showed the government's resolve to cut a bulging budget deficit.

Taking both the second and third quarters together, Britain enjoyed its strongest six-month growth spurt since the first half of 2000.

However, this momentum is not expected to last. Cuts to public sector jobs and spending start in earnest next year, and a rise in value-added tax and reductions in some benefits will take money out of consumers' pockets.

Patchy overseas demand for British exports and tight credit from banks add to the difficulties the private sector will face in replacing public sector activity.

"It does not fundamentally change our view that growth will be markedly slower going forward," said Howard Archer, an economist at IHS Global Insight.

A quarter of Britain's third-quarter expansion was due to the construction sector, which enjoyed its second successive quarter of strong growth following disruption from an unusually icy winter. On the year, construction output grew 11 percent, its best showing since 1988.

However, the boost from construction is already starting to wane. Public works contracts have been one of the first casualties of Britain's austerity drive and house prices have weakened over the summer.

"Looking ahead, with the cuts already set out in the comprehensive spending review, contractors face a difficult period ahead and optimism in the civil engineering sector is not high for 2011," said the Civil Engineering Contractors' Association's head of industry affairs, Alasdair Reisner.

Services growth held steady at 0.6 percent on the quarter but industrial output growth slowed to 0.6 percent from 1.0 percent in the previous quarter.

The EEF, which represents manufacturers, said Britain's recovery appeared steadier than that after past recessions, but that future growth could not be guaranteed.

"Below the headline number we are still only seeing tentative signs of the economic rebalancing the UK needs," said EEF senior economist Jeegar Kakkad. "The rising risk of a currency war, coupled with cautious consumers at home, could still derail recovery."

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.

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