Downward revision for third-quarter growth
Thursday 23 December 2010
Downward revisions to third-quarter economic growth poured cold water on evidence of Britain's much-needed export-led recovery yesterday.
And the Bank of England interest rate committee is still split three ways over monetary policy amid mounting concerns over rising inflation.
At the Bank's Monetary Policy Committee (MPC) meeting this month, Andrew Sentance voted for an increase to interest rates to head off persistently above-target inflation, while his colleague Adam Posen called for a £50bn expansion of the Bank's quantitative easing programme (QE) to boost demand, the minutes of the meeting, published yesterday, reveal.
The balance of the nine-strong group decided to hold rates at the historically low 0.5 per cent and hold off any addition to the £200bn QE programme.
But the committee did agree that the balance of risks of higher inflation was rising, fuelled by increases in global commodity prices and the 2.5 percentage point VAT increase on 1 January. "The MPC noted that inflation was likely to rise further over coming months and could well reach 4 per cent by the spring, somewhat higher than the November Inflation Report central projection," the minutes said.
Separately, the third and final revisions to the official third-quarter GDP figures, published yesterday, revised Britain's economic growth downwards by 0.1 percentage points to 0.7 per cent, due to slightly lower utilities and service sector output.
Painting a less rosy picture than the first draft published in October, the Office of National Statistics (ONS) also cut back first and second quarter growth, to 0.3 and 1.1 per cent respectively.
Economists are now predicting annual expansion of around 1.7 per cent, rather than 1.8 per cent.
The latest national accounts will be closely studied at the Treasury, where George Osborne, the Chancellor of the Exchequer, is relying on strong private sector growth to avoid a "double dip" recession and sustain Britain's economic recovery in the face of swingeing austerity measures set to slash £81bn out of public spending over the next four years.
Some aspects of the ONS revisions are encouraging news for Mr Osborne. Business investment – long depressed by recessionary fears – was revised upwards to a record 3.1 per cent growth rather than the 0.2 per cent drop first estimated.
And the slight tweak cutting government spending by 0.4 per cent leaves the private sector responsible for a higher proportion of the improving performance than previously thought.
But there are broader, more worrying signs that caution against unbridled optimism. Sharply growing business investment represents less than a tenth of the economy. Of far greater relevance are the net trading numbers, revised downwards from positive to negative, as the 1.7 per cent boost to imports outweighed a 1.5 per cent export growth. Before the latest revisions, trade accounted for around half of the third-quarter GDP boost. The latest figures revise that down to almost nothing, making a mockery of the much-vaunted export-led recovery.
"Even if the strong growth in business investment continues, that on its own won't sustain the recovery as government spending drops," Vicky Redwood, at Capital Economics, said.
"It is far more worrying that the trade figures were revised away because it is exports that we need to get through the next year or two."
The ONS also revises up the household saving levels from 3.5 to 5 per cent. Against the backdrop of increased consumer spending, higher saving levels are good news, indicating rising income. But 5 per cent is still too low to offset the ballooning debts accrued before the financial crisis.
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