Osborne puts on brave face after weak growth figures

Chancellor 'positive' as latest GDP report shows economy grew just 0.5 per cent in last quarter

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David Cameron ordered his Cabinet ministers to come up with more "go-for-growth" policies yesterday as new figures showed that the economy grew by just 0.5 per cent in the three months to September.

In a sign of growing Downing Street and Treasury frustration at the slowness of some departments to identify projects and policies to boost growth, Mr Cameron told ministers to "roll their sleeves up" and focus on implementing its growth strategy. Although the Prime Minister insisted there was "unity of purpose" in the Cabinet on the Government's fiscal strategy, his spokesman said his words reflected fears about the "obstacles" to pro-growth measures such as planning rules and clearing legal hurdles before major building projects could go ahead.

While yesterday's Office for National Statistics (ONS) figures for the third quarter were slightly better than the expectations of City analysts, they were not good enough to put the economy back on track to meet the Office for Budget Responsibility's most recent forecast for growth of 1.7 per cent in 2011. And many private sector forecasters warned that the economy could contract in the final quarter of this year.

In the Commons, George Osborne rebuffed calls for a U-turn as he clashed with Ed Balls, the shadow Chancellor, who asked: "How much longer will the country have to wait before the Chancellor decides to listen?" Accusing Mr Osborne of complacency, he said the UK recovery was "choked off" by the Government's austerity package, not the crisis in the eurozone.

The Chancellor described yesterday's figures as "positive", insisting that a change of direction would not help the UK economy. He said America had tried to inflate their way out of recession, only to have similar growth figures to the UK.

According to the ONS, some economic activity in the three months to September was displaced from the previous three months due to one-off disruptions including the Royal Wedding and the Japanese tsunami. Howard Archer, an economist at IHS Global Insight, said: "This performance overstates the underlying strength of the economy and this is likely to be as good as it gets for some time to come." Over the last two quarters the UK economy expanded by just 0.6 per cent, indicating an anaemic rate of growth.

The total level of UK GDP is still around 4 per cent below the level reached before the 2008 recession. And at this rate of growth, those pre-crisis levels of output will not be reached again until 2013. That will make this period of depressed output longer than that experienced in the wake of the Great Depression of the 1930s.

Most of the UK's growth in the most recent quarter came from the services sector, which expanded by 0.7 per cent. Manufacturing, which Mr Osborne had hoped would be the engine of the UK's recovery, expanded by just 0.2 per cent. That disappointing news was compounded yesterday by the results of a regular survey of manufacturers, which indicated that the sector began to contract last month. The manufacturing PMI index fell from 51 to 47.4 in October, driven, in part, by falling orders from the troubled eurozone.

Nida Ali, an economic advisor to the Ernst & Young Item Club, said: "Clearly the knock-on effects of the recent turmoil in financial markets are starting to be felt on the UK economy, and these trends are likely to continue in the coming months. With the recovery heavily dependent on exports to power the recovery, this doesn't bode well for growth in the months ahead."