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.

15 Responses to “Economic growth beats expectations”

  1. Shamik Das

    The UK economy grew far more rapidly than expected in the third quarter http://bit.ly/asJD4U writes @ippr's Tony Dolphin on @leftfootfwd

  2. Will Straw

    Excellent analysis of the GDP numbers by Tony Dolphin on @leftfootfwd http://bit.ly/asJD4U

  3. Adam Lent

    RT @wdjstraw: Excellent analysis of the GDP numbers by Tony Dolphin on @leftfootfwd http://bit.ly/asJD4U

  4. Mike Thomas

    My own analysis shows that 75% of the last quarter growth came from the private sector which bodes well for their capacity to create jobs. Finally, these are the best Q3 growth figures for over 10 years.

    How you missed these two beggars belief but can be explained by:

    a) there is left-wing doubt on the private sector creating growth
    b) there is every chance of a double-dip recession.

    I’ll leave you with the fact that the ONS usually revises early figures upwards.

    Cheerio.

  5. Tony

    Mike
    We don’t have enough information to estimate the proportion of growth that is due to the public sector. What proportion of the leap in construction output was financed by public money and what proportion by private? We can only guess. That said I’d accept most of the growth was in the private sector and, as I said, these are good figures for the optimists.
    The fact this is the best Q3 growth in ten years is irrelevant. GDP figures are seasonally adjusted, so all quarters are comparable. These are the best quarterly growth figures since the last ones … but they are the best annual growth figures since Q3 2007.

  6. william

    OMG, we do not want more QE which will guarantee future inflation and turn sterling into a joke currency.The GDP numbers are ,in part, the consequence of Darling’s savvy policies from which the present government will benefit.

  7. Ash

    “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.”

    Yes – and those who think we could rely more on growth and less on cuts to tackle the deficit have some evidence to support *their* case.

    What we mustn’t lose sight of is that the cuts haven’t happened yet. This level of growth is happening under *Labour’s* spending plans. (So much for the state having to ‘get out of the way’ to allow the private sector to grow.)

    We’ll see what level of growth we end up with under the Coalition’s policies next year. My guess – somewhat less than 3.2%.

    The burning question for me is: if the underlying trend for growth is presently twice as high as we thought – 3.2% rather than 1.6% – doesn’t that mean we have substantially overestimated the size of the structural deficit?
    Back-of-an envelope calculation: 1.6% higher growth = £22bn higher GDP = £10bn higher tax revenues + £2bn lower welfare payments = deficit closed by £12bn.

    If, in the light of this new data, we were justified in revising upwards our growth forecasts for the next five years by even half that much – 0.8% a year – we could expect growth to contribute maybe £40 billion more to deficit reduction than we thought likely back in March or June. That would imply that at least £40bn of proposed ‘deficit reduction’ measures on tax & spending simply aren’t necessary.

    I’d love to hear some expert opinion on this. Doesn’t the estimate for the size of the structural deficit get revised in light of new data on growth?

  8. Mr Jabberwock

    I think it is great that you have put up a post on this when it doesn’t quite fit your narrative – that doesn’t mean your narrative is wrong (though I think it is) but it would be easy to ignore it or be dismissive.

  9. harry potter

    i think the growth has a lot to do with business and consumer confidence being greater than what it would have been because the government is seen to have a credible plan for the deficit

  10. Ash

    Mr Jabberwock

    Very low growth certainly fits the ‘don’t cut, the economy’s too fragile’ narrative. But a responsible government wouldn’t just take higher-than-expected growth as a license to carry on cutting; they’d ask themselves whether such drastic cuts were necessary after all. So it’s not as if us lefties no longer have any grounds to oppose the Coalition’s strategy – we can stick to our guns on the question of growth vs cuts as a means of reducing the deficit.

  11. Ash

    Harry –

    That possibility can’t be ruled out. But growth was actually at its highest in the few months after Alistair Darling’s last budget, so by that logic…

  12. Jose

    Your comment re ‘massive fiscal tightening’ is totally misleading given the tiny difference in Coalition and previous Labour plans!

  13. Mark Stevo

    Would echo the previous comment, LFF has gone up massively in my estimation after running this fairly objective article.

  14. Fat Bloke on Tour

    *******
    Ash et al — Structural Deficit

    2009/10 Deficit = 11%’ish at the last count.
    Deficit = Strutural + Cyclical element
    Cyclical deficit = Primary number in this calculation.
    It is worked out using the output gap, what the economy is currently producing vs what it could produce if all the productive elements were in use inflation permitting.
    Structural Deficit = Secondary, derived number.
    That is what is left over.

    The Treasury view on this is open to significant comment.
    AD using the Treasury’s figures put the output gap at 6%.
    From memory this led to a Cyclical deficit of 3.5%’ish.
    At the time is was published the deficit was estimated to be in the region of 12.3 / 12.4% approx though as the figure below show it jumped about a bit.

    2009/10 Budget Deficit

    2009 Budget = £175bill
    2009 PBR = £178bill
    2010 AD Budget = £165bill
    2010 OBR Report = £156bill
    This last figure includes £3bill paid back by the banks so all the figures are not apples for apples in comparison terms.

    The estimates show that when required the Treasury could bend it like Beckham. Any thoughts on the PBR number being massaged to limit AD’s room to do a little reflating ?

    However the point is that when the budget deficit was estimated at being some way north of 12% the output gap was taken to be 6%.

    In deficit terms this came out as Structural 8.8% / Cyclical 3.5%

    Enter the OBR in May / June 2010 with actual figures on the 2009/10 deficit. However in its wisdom it reduces the output gap from 6% to 4% leading to the Cyclical Deficit falling from 3.5% approx to 2.3%. Next up is the biggy the Structural Deficit and guess what happened to that, your right absolutely nothing.

    AB and the OBR keep the figure at 8.8% of GDP.
    Guess what Sniffy is basing his slash and burn cutsfest on?
    Eliminating the structural deficit in 4 years.

    Treasury – 6% output gap and 12.3% estimated deficit = 8.8%
    OBR – 4% output gap and 11.1% actual deficit = 8.8%
    Bit of a coincidence don’t you think?

    If the Output gap had stayed at 6% the structural deficit would have been in the order of 7.5% of GDP, a significant improvement on the 8.8% number driving the Coalition’s cuts. That is no need to butcher CB, EMA or ask the RN to launch a 65K ton bowling green.

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