Growth boost fails to dispel gloom

Better-than-expected UK growth figures were today overshadowed by a manufacturing slump and grim predictions the economy could yet collapse back into recession.

Gross domestic product (GDP) grew by 0.5% between July and September, the Office for National Statistics (ONS) said, up from 0.1% growth in the previous quarter and ahead of predictions of 0.3%.

But economists warned the latest figures were flattered as the economy played catch-up from the previous quarter, which was hit by one-off factors such as an extra bank holiday for the royal wedding.

Elsewhere, a closely watched Markit/CIPS survey showed the manufacturing sector slipped into decline in October, fuelling fears the economy could contract in the final quarter of 2011.

Chancellor George Osborne said the figures represented a "step forward", while Labour said they provided further evidence that the Government's austerity measures were choking off the recovery.

Efforts to "rebalance" the UK economy towards more exports have been hampered by recent market turbulence amid doubts that a recently announced eurozone rescue package can solve the bloc's deep-rooted debt problems.

Meanwhile, UK consumers are reining in spending as living standards face the biggest squeeze since the 1920s amid spiralling inflation and the Government's austerity measures.

The encouraging figures for the third quarter were immediately followed by the dismal PMI data, which revealed manufacturers suffered the quickest fall in new orders since March 2009.

Chris Williamson, economist at Markit, said: "While it is reassuring to see that the economy did not slide back into contraction, the third quarter is already history.

"More important are the forward-looking indicators, of which today's release of the manufacturing PMI is the most alarming."

The third quarter GDP figures - which are an initial estimate and may be revised in coming weeks - were boosted by a strong performance from the powerhouse services sector, which rose 0.7%.

Production industries, which include manufacturing and oil and gas production, also increased 0.5%, compared with a fall of 1.2% in the previous quarter.

This helped offset a 0.6% contraction in the construction industry after a rise of 1.1% in the previous quarter.

The ONS said the so-called English riots in August did not have a noticeable effect on the overall GDP figure.

It said the economy has grown by 0.6% over the previous two quarters, which gives a clearer picture of the underlying trends.

This means the economy is growing at half the speed of long-term trends, which have seen it expand at an average of 0.6% every quarter in recent decades.

The previous quarter had been hit by the unusually warm spring, which caused households to turn off their heating early, disruption to the supply chain following the Japanese tsunami and the extra bank holiday for the royal wedding.

Graeme Leach, chief economist at the Institute of Directors, said today's GDP figures were welcome but failed to capture the turmoil in the eurozone, as a rescue plan has been jeopardised by Greece's decision to put it to a vote.

He said: "GDP growth is almost certain to flatten off, or even fall, in the fourth quarter of this year due to postponed business investment and consumer caution, even if the eurozone crisis stabilises.

"Unfortunately we don't think the crisis is over, it will continue to haunt recovery prospects in the UK."

The gloomy economic forecasts heaped fresh pressure on the Government to reassess its deficit-busting plan amid plummeting consumer confidence and high unemployment.

Shadow Chancellor Ed Balls said: "The fact is that our recovery was choked off well before the eurozone crisis of recent months by spending cuts and tax rises which go too far and too fast."

But the Chancellor said today's figures represented "a positive step forward" for the UK economy.

He added: "Of course, the British economy has got a difficult journey to take, from its debt-fuelled past. That's a journey made more difficult by the kind of problems you see today in the eurozone.

"But the important thing is today we took a step forward down that road, and the road will lead to recovery and prosperity."

PA