Economic growth beats expectations

The UK economy grew far more rapidly than expected in the third quarter. Real GDP (the total output of the economy) increased by 0.8 per cent and was 2.9 per cent higher than in the third quarter of 2009, according to figures released today by the Office for National Statistics. Economists had expected an increase of just 0.4 per cent.

The UK economy grew far more rapidly than expected in the third quarter. Real GDP (the total output of the economy) increased by 0.8 per cent and was 2.9 per cent higher than in the third quarter of 2009, according to figures released today by the Office for National Statistics. Economists had expected an increase of just 0.4 per cent.

Growth in the second quarter was 1.2 per cent, though this was boosted by a recovery from the effects of the bad weather which depressed activity in some sectors in the early part of the year. Over the last three quarters, growth has averaged 0.8 per cent, or an annual rate of 3.2 per cent and this is as good an estimate as any of the underlying trend in recent quarters.

Growth is being led by an extraordinary surge in activity in the construction sector, where output has increased by 12.9 per cent in the last three quarters. But there have also been healthy recoveries in activity in two other sectors: manufacturing (up 4.1 per cent over the same period) and business services and finance (up 2.4 per cent). Output in all other sectors has grown less rapidly than overall GDP and that of the service sector as a whole increased by only 1.4 per cent over this period.

It does seem, therefore, that there is an element in these figures of those sectors that were most badly affected by the recession – construction, manufacturing and finance – enjoying a bounce back from very depressed levels of activity while the recovery in other sectors is more sluggish.

If growth in these three sectors slows – which is what has happened in the US, and the UK economy appears to be following one or two quarters behind the US economy – overall growth rates are likely to be lower in 2011. This is particularly the case if public spending cuts and January’s VAT rate hike have a negative effect on activity (though the VAT hike might actually boost spending and output in the final quarter if households bring forward some spending to avoid the increase).

That is certainly what most economists, including the Office for Budget Responsibility, are forecasting. But then most economists thought growth would be a lot lower in the third quarter too, so what do they know? As JK Galbraith said, there are two types of economic forecaster: those who are wrong, and those who know they are wrong.

For now, those who are most optimistic about the UK economy – and who believe that it can cope with the massive fiscal tightening being imposed by the coalition government – have some evidence to support their case.

But the most immediate effect of these figures is likely to be a postponement of any move by the Monetary Policy Committee to increase the scale of quantitative easing. There have been suggestions in recent days that the MPC could make such a move after its meeting next week, but that will only happen now if the Bank’s economists are taking a very negative view on the economic outlook for 2011 and 2012.

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