The British economy has confounded sceptics and City forecasters again by registering another surprisingly strong growth figure, while the Standard & Poor's credit rating agency raised its outlook for the UK from "negative" to "stable".
Against expectations that the economy would expand by 0.4 per cent over the period from July to September, the Office for National Statistics announced GDP growth of 0.8 per cent. That echoes the surprise announcement earlier this year of 1.2 per cent growth over the second quarter, and brings the total growth this year to 1.7 per cent – higher than most estimates for total growth this year. But the economy has still only made up about half the ground lost during the recession; some 2.8 per cent of the 6.5 per cent lost in total.
The news will lessen the chances that the Bank of England will need to embark on a further early round of quantitative easing (QE), injecting money into the economy, which had been expected next month. Sterling rose, gilt prices fell and their yields went up, all reflecting the likely postponement of the next round of QE.
However, most observers still expect the spending cuts and tax changes to slow the economy down in 2011, and that the Bank will in due course return to QE. Andrew Sentance, a member of the Bank's Monetary Policy Committee, is maintaining his support for a tightening of policy: "I'm in favour of gradually moving interest rates up from their very low level, which I think can be done without disrupting business and consumer confidence."
On expanding QE, Mr Sentance added: "It seems to be to be taking economic policy in the wrong direction. We've seen with the figures today that growth is reasonably healthy, and inflation is running above target. Those are all signs that, if anything, monetary policy should be beginning to reduce the stimulus, not add to it."
The national statisticians took the highly unusual step of stressing how freakish winter weather has distorted the figures. The ONS said: "Allowing for the recovery in the second quarter following the bad weather at the start of the year, the underlying growth in the third quarter is broadly similar to that in the second quarter."
One of the largest contributions to the growth figure came from the construction sector, which accounted for a quarter of the new growth, despite representing only 6 per cent of the economy. On an annualised basis, activity in the building trade is up 16 per cent, though from a depressed base.
Otherwise, business services, especially in telecoms and in computer support did exceptionally well, as did road haulage and the retail trade. Banking and other financial services were less strong. The Engineering Employers' Federation pointed out that manufacturing in the UK had enjoyed its best 12 months since 1994, boosted by exports, though they warn that the nation "can't take growth for granted".
Nonetheless, economists say that the cuts in public spending and tax hikes announced by the Government – including a rise in VAT to 20 per cent in January – will make their presence felt as 2011 goes on.
David Kern, the chief economist at the British Chambers of Commerce, added: "The MPC must persevere with expansionary policies and reject any thought of early interest rate increases. Whilst it may be reluctant to increase its QE programme in November, such a step must remain under active consideration." Standard & Poor's said: "The completion of the Spending Review reduces uncertainties about political resolve to tackle the challenges resulting from the structural deterioration in public finances."Reuse content