'Explosion' in imports keeps Britain in recession

Third-quarter GDP figure revised upwards by just 0.1 percentage point

The Government's car scrappage scheme has prompted an "explosion" in imports that helped prevent the UK economy emerge from recession, analysis of the latest GDP figures shows.

The Office for National Statistics yesterday revised its estimate of GDP in the third quarter of this year from a contraction of 0.4 per cent initially published to one of 0.3 per cent. New evidence of a marginally better performance in the service sector was responsible for the shift. But the small adjustment merely reinforces the fact that the UK is lagging other major economies in returning to growth.

In contrast to the UK, the US, Japan, Germany, France, the eurozone as a whole and the OECD nations as a group all saw their economies expand between June and September.

Economists at HSBC pointed to the poor contribution from British trade as a major factor that helped make the difference between recovery and continued recession – and pointed to the scrappage scheme as the culprit. The £400m programme, in effect a subsidy on car sales partly funded by the Treasury, has been responsible for a substantial increase in imports of smaller cars made abroad – the UK industry generally specialising in more expensive, larger vehicles.

Analysts were disappointed that the process of de-stocking had not yet ended – where companies and retailers supply from stock rather than placing new orders for goods and services. However, Karen Ward, the UK economist at HSBC, added: "The bigger surprise comes from the explosion in imports, which rose 1.3 per cent on the quarter. Net trade therefore detracted 0.2 per cent points from quarterly growth. The latest data show that more than a third of the deterioration in the trade in goods in September was owed to a sharp rise in car imports."

Longer term, there were also some encouraging signs in the latest figures, and these reinforced hopes that the UK will indeed emerge from recession by the end of the year. In particular, consumer spending stabilised after contracting over the previous five quarters, while investment fell at a much reduced rate. Coupled with signs of stabilisation in the housing market and a surprisingly modest rise in unemployment, some believe that prospects for the UK economy are rosier than the historical data indicates.

Charles Davis, a senior economist at the CEBR, said: "There are clear indications that the pace of de-stocking will ease. We expect growth to return to the UK in the fourth quarter – and it could be stronger than might be expected as the inventory cycle turns."

So far this year the economy has shrunk by about 3.5 per cent, roughly in line with the Chancellor's forecast in the Budget.