Britain's recovery is being powered by consumer spending, rather than exports and investment, raising doubts about the sustainability of this year's solid economic upturn.
The latest official estimate of GDP in the second quarter yesterday confirmed the economy grew by 0.7 per cent over the second quarter, but they also revealed this activity was driven by consumer spending and by firms building up their inventories.
Consumer spending was 0.3 per cent higher on the quarter, and up 1.8 per cent on an annual basis. The picture of a public increasingly inclined to open its wallet is supported by the latest GfK/European Commission Consumer Confidence Index which rose in September to its highest level since November 2007.
According to the Office for National Statistics net trade, which accounted for most of the 0.4 per cent growth registered in the first three months of the year, made no contribution whatsoever in the second quarter, as a surge in imports cancelled out the benefits of rising exports. Business investment fell 2.7 per cent on the previous quarter and was down by a hefty 8.5 per cent on an annual basis. Gross capital formation was positive because firms increased their stockpiles.
Earlier this month George Osborne hailed "tentative signs of a balanced, broad-based and sustainable recovery". But economists said the latest ONS figures should temper enthusiasm about the underlying strength of the recovery. "While not a disaster it provides something of a reality check after a period of very strong UK data releases," said Simon Wells of HSBC.
The household savings ratio rebounded to 5.9 per cent in the second quarter, up from 4.4 per cent in the first three months of the year. But incomes and savings were distorted over the six months by the delaying of bonuses payments between the quarters in order to take advantage of the Government's reduction in the top rate of income tax in April.
"Smoothing through that volatility the underlying picture is much clearer. Households' real incomes were flat over the first half of the year, and the savings rate has fallen sharply," said Rob Wood of Berenberg Bank.
The ONS revised up its estimate of growth in the first quarter to 0.4 per cent, from its earlier estimate of 0.3 per cent.
However, there were also modest downward revisions for the third and fourth quarters of 2012. Overall growth in the year was revised down to 0.1 per cent, from 0.2 per cent previously. The GfK index also showed improved public perception of the general economic situation over the next 12 months.