UK economy grows twice as fast as expected in Q3

AP News
Posted: Oct 26, 2010 8:57 AM
UK economy grows twice as fast as expected in Q3

Britain's economy grew by 0.8 percent in the third quarter, twice as fast as expected, according to official figures released Tuesday which will calm fears of a double-dip recession.

The growth followed a rate of 1.2 percent _ a nine-year high _ in the second quarter, when restocking of inventories and construction surged. The combined expansion was the strongest back-to-back performance by the British economy in a decade, the Office for National Statistics said.

Economic output is now 2.8 percent higher than in the third quarter of 2009, the last three months of a steep 18-month recession.

Prime Minister David Cameron's government got more good news as Standard & Poor's Ratings Services upgraded its outlook for British debt from "negative" to "stable" _ indicating no threat of a downgrade _ and reaffirmed the AAA rating on long-term debt.

"This is the second major GDP growth surprise in a row and suggests that the U.K. economy is more resilient than many had feared," economist James Knightley at ING said of the data release.

"The government will no doubt take this as a sign that the private sector can fill the gap created by public sector cuts, but with consumer confidence, hiring intentions surveys and housing activity data all softening, we remain cautious."

The growth will ease pressure on the Bank of England to expand its program of asset purchases, or quantitative easing, to stimulate the economy.

Output of the service industries grew by 0.6 percent, a rate matched by manufacturing and other production industries, while construction activity was up 0.4 percent in the third quarter.

"These numbers will clearly ease near-term concerns over a possible double dip in the U.K. economy and suggest that GDP growth this year will be a bit stronger than our previous forecast of 1.5 percent," said Jonathan Loynes, chief European economist at Capital Economics.

The government is counting on a surge in private sector activity to replace nearly half a million jobs which will be lost to public-sector budget cutting.

Analysts warn, however, that this fiscal tightening, combined with tight credit conditions and slow global growth, will dampen growth significantly in coming quarters.

S&P analyst Trevor Cullinan said he expects Britain's fiscal deficit, which equaled 11.2 percent of GDP in 2009, to be cut to 3 percent in 2014 _ a full percentage point better than his previous forecast.

"We expect that the government will implement most of its expenditure-led fiscal consolidation program, which we believe is likely to cause the net general government debt burden to peak at approximately 80 percent of GDP in 2013 and decline thereafter," Cullinan said.

While Thursday's report made it unlikely that the Bank of England's Monetary Policy Committee would vote next month to resume the quantitative easing program, which paused at 200 billion pounds ($317 billion), one member said consumer price inflation _ currently 3.1 percent _ remained "a bit of a worry."

"I'm in favor of gradually moving interest rates up from their very low levels, as I think could be done without damaging business and consumer confidence," Andrew Sentance said in an interview with the BBC. He has been urging a quarter-point hike from the all-time low base rate of 0.5 percent.

So far, none of the panel's other eight members has supported him, and MPC member Adam Posen this month was alone in voting for another 50 billion pounds of stimulus.