The Government received a much-needed boost yesterday from a revision to estimates for economic growth that put the Treasury's optimistic forecasts back on track.
The annual rate of GDP growth for the second quarter of the year was revised up to 2.3 from 2.1 per cent. This leaves it just within the Budget forecast of 2.25-2.75 per cent. National Statistics, a government department, yesterday also revised GDP up for every year going back to 1987.
The figures provide further evidence that the UK is not on the brink of recession. Economists said this might insulate the UK from some of the impact from the terrorist attacks on the United States. The average City forecast is for growth of 2.1 per cent for this year as a whole. But the new data are unlikely to influence the Bank of England's monetary policy, as they do not cover the impact of the 11 September outrage.
NS said the main reasons for the revision to the last quarter were stronger growth in the construction and services sector, especially the telecom and financial industries. This helped to offset sharp falls in manufacturing and agricultural, which have suffered from the slump in the US and foot-and-mouth disease, respectively. NS also revised up the rate of growth in household spending – a key factor in underpinning the UK economy this year. It is now running at 1.3 per cent, its strongest level since the end of 1994. The figures also showed a marked fall in business profitability. Gross trading profits fell by 0.7 per cent, bringing them back to 1998 levels. Danny Gabay, an economist at JP Morgan, said the figures showed that prior to the attacks, there was scant evidence of any slowdown in domestic demand. "Unfortunately 11 September did happen and a decline in confidence and activity seems inevitable so we expect another quarter-point off the base rate," he said.
The Bank meets next week and most economists expect it to order the sixth quarter-point cut so far this year, taking the base rate to 4.5 per cent. Economists said yesterday's data would underline fears among the hawks on the Monetary Policy Committee that inflation would rise sharply once the UK recovered from the impact of the attacks.
Michael Saunders, at Schroder Salomon Smith Barney, said he doubted that forecasts for UK growth would be revised down as much as in other industrialised countries. "These revisions support the view that the MPC probably will ease [policy] by less than most other major countries" he said.
Meanwhile, two surveys yesterday showed pay settlements remaining steady at relatively low levels. Pay specialists IRS said 70 settlements in the three months to August and covering 400,000 people gave an average pay deal of 3.0 per cent, unchanged from the previous two surveys. The Engineering Employers' Federation (EEF) said the average deal in its sector was 2.6 per cent in the same period.Reuse content