Broad based recovery as GDP growth stuns critics

THE UK economy has confounded forecasts by growing 0.8 per cent during the third quarter of this year. Consensus was for an expansion of 0.4 per cent, on the basis of slowdowns in consumer spending, house prices and declining sentiment in PMI surveys.

Unexpectedly strong figures for the construction sector were one reason for the surprise: the sector accounted for a quarter of the overall 0.8 per cent rise, despite making up only six per cent of the economy.

Construction grew four per cent quarter-on-quarter, faster than services or manufacturing, which each grew 0.6 per cent. Services account for 76 per cent of GDP.

Government output growth expanded 0.6 per cent, also above expectations. It is not yet clear whether the construction sector’s strong performance is due to private or public investment and therefore what effect government spending cuts will have.

The figure means that the economy as a whole has now grown 2.8 per cent since the end of the recession, in line with recovery speeds after previous downturns. It has prompted economists to revise their overall forecasts for GDP growth to around two per cent for the year, up from many previous estimates of 1.5 per cent.

The data release came as ratings agency Standard & Poors raised the outlook on the UK’s AAA credit rating to stable from negative, citing reduced uncertainty about the coalition’s deficit reduction plan.

But economists warned that the strong growth might be only a temporary respite.

RBS’s Ross Walker, whose GDP tracker correctly forecast the surprise figure, thinks that the fourth quarter will see growth halve to 0.4 per cent.

“The recent headline growth rates are obviously not sustainable,” he says. “The construction sector was hit hard during the recession so this is partly a private-sector rebound. The services PMI is the chink in the third-quarter GDP armour, with risk of further moderation or sluggish growth.”

But he says the distribution of the growth raises the possibility that the economy could rebalance away from a concentration in services. Expectations are now that the Bank of England (BoE) will wait for more data before kicking off any quantitative easing (QE) programme. Some had anticipated a possible resumption of asset purchases next month.

Schroders’ Azad Zangana says: “Even using pre-crisis measures of trend growth, this figure is above trend. With inflation still running above the BoE’s three per cent upper limit, it will be incredibly difficult to justify resuming QE in November.”