Analysts expect earlier interest rate rise as speed of economic growth is revealed

GDP expanded by 0.8 per cent between July and September, the biggest quarterly jump in output since 2010

Ben Chu
Friday 25 October 2013 19:24

The economy is growing at its fastest pace in three years, official figures today confirmed. The Office for National Statistics reported that GDP expanded by 0.8 per cent between July and September, the biggest quarterly jump in output since 2010. The output of the entire economy was 1.5 per cent higher in the third quarter of 2013 than it was in the same period a year earlier.

"This shows that Britain's hard work is paying off and the country is on the path to prosperity" said the Chancellor, George Osborne, on Twitter. Labour welcomed the news but pointed out that real wages for most people are still falling. "For millions of people across the country still seeing prices rising faster than their wages this is no recovery at all" said the shadow Chancellor, Ed Balls.

Growth was broad based, according to the ONS, with all three major sectors of the economy expanding. The dominant services sector grew by 0.7 per cent, while industrial production and construction expanded by 0.5 per cent and 2.5 per cent respectively. Manufacturing output grew by 0.9 per cent.

However, the ONS reported that the economy remains 2.5 per cent below its peak level in the first three months of 2008, making this easily the slowest recovery from a recession on record. And some City of London economists expressed concerns about the sustainability of the high growth rate, pointing out that the recovery has largely been driven this year by increased consumer spending and a falling household savings rate.

"This is an encouraging mix although there is still relatively little evidence of a rebalancing of the UK economy" said James Knightley of ING. "While service sector output is now above pre-recession levels in real terms, construction is still down 12.5 per cent on the first quarter of 2008 and production industry output is down 12.8 per cent".

Howard Archer of IHS Global Insight warned the high rate was unlikely to maintained into 2014. "GDP growth seems likely to ease back following the surge in activity in the second and third quarters given still significant constraints, notably including consumers' squeezed purchasing power" he said.

Nevertheless, City analysts predicted decent growth would help push down the jobless rate and bring a rate rise into play earlier than the Bank of England currently has pencilled in. Under its forward guidance policy, the Bank has said it will not consider a rate rise until unemployment falls below 7 per cent.

"We expect the first interest rate rise to come at least a year earlier than the late 2016 date the Bank has signalled" said Rob Wood of Berenberg. "All eyes will now turn to the Bank of England which needs to provide an update on its forward guidance on interest rates" added Azad Zangana of Schroders.

The third quarter growth was slightly higher than the 0.7 per cent expansion predicted by the Bank's Monetary Policy Committee, as revealed by this week's minutes of its October meeting. The Bank's November Inflation Report, due out on 13 November, is now widely expected likely to bring forward the date when unemployment falls to the 7 per cent threshold. Money markets rates suggest City traders think the first rise in the base rate will come in early 2015.

The GDP estimate from the ONS was exactly in line with City expectations, but still helped to lift the pound to $1.62, before it fell back again. The 10 year Gilt yield was flat in morning trade.

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