Household spending ticks up, but growth remains sluggish

Spending by UK households picked up in the third quarter to grow at the fastest pace in nearly a year, suggesting that consumer spending has finally turned the corner.

Government figures showed yesterday that household spending was up 0.5 per cent. Even so, overall economic growth remained sluggish at 0.4 per cent, the fifth consecutive quarter the economy has grown below its long-term average. That suggests the economy is still on course for this year to show the slowest annual growth since 1992, at 1.7 per cent.

The Bank of England's chief economist Charlie Bean told the Birmingham Evening Mail yesterday that media reports had tended to exaggerate the extent of the economic slowdown. "It is a slowdown, but it is not all doom and gloom," he said. "We think that there are some signs of a moderate pick-up in prospects and a return to trend growth rates next year."

The central reason behind weak growth in the third quarter was a sharp drop in the output of the oil and gas industries related to one-off factors. Maintenance work on oil and gas fields carried on for longer than usual over the summer and a fire at an oilfield affected extraction throughout August.

Stripping out oil and gas, the economy would have grown by 0.6 per cent in the third quarter, close to the long-term trend rate of growth.

Malcolm Barr, at JP Morgan, said: "There is little reason for the Bank of England to contemplate a further reduction in rates if, as we expect, the stabilisation in GDP growth at a near trend rate revealed in this report is sustained."

However, economists are divided over whether the next move in interest rates will be up or down, following August's rate cut. The Bank has signalled that rates will stay on hold for several months. On Thursday the Governor, Mervyn King, issued a stark warning that the Bank would raise rates if workers won inflation-busting pay rises to offset the surge in energy costs.

Meanwhile, John Butler at HSBC warned of a "recovery built on marshlands," as the third-quarter growth figures benefited from a strong contribution from inventories, which could unwind in the quarters to come. A poor trade performance also undermined Mr King's expectation of a rebalancing in the economy.

In the latest sign that the housing market is now stabilising, mortgage approvals reached their highest level since the middle of last year in October, according to figures from the British Bankers' Association. They were up 23 per cent from a year ago.