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Economic growth strengthens in third quarter


UK economic growth picked up in the third quarter of the year to a better than expected 0.4%, according to preliminary figures.

In its first estimate of growth for the three months to September, the Office for National Statistics (ONS) said spending in the dominant services sector continued to be the engine behind the economy’s performance.
However, the fact growth was driven by a pick-up in retail spending and car sales will intensify worries at the Bank of England that people are living beyond their means as unsecured consumer debt levels hover around pre-crisis highs at £200bn.
The headline growth figure fuelled expectations the Bank will move to make borrowing less attractive and tackle rising inflation next month by raising interest rates from their post-Brexit vote low of 0.25%.

Video: The ‘trade-off’ facing Bank on rates

Sterling – which took a pounding after the EU referendum result – sparked the inflation surge as imports became more expensive.
The pound gained almost half a cent against the dollar when the ONS figures were announced as the prospect of a rate rise seemed more assured.
The stats also provided some hope that manufacturers are taking advantage of the weaker pound, which makes UK goods more competitive abroad.
Industrial production was up 1% in the third quarter – its best performance for over a year – though construction continued to lag with output down 0.7%.
The Chancellor, Philip Hammond, said of the performance: “We have a successful and resilient economy which is supporting a record number of people in employment.
“My focus now, and going into the Budget, is on boosting productivity so that we can deliver higher-wage jobs and a better standard of living for people across the country.”

Image: Mr Hammond will deliver his Budget on 22 November
The figures were stronger than had been expected by economists, who had been anticipating growth of just 0.3%.

Moreover, save for the construction sector, this was pretty broad based growth.
The manufacturing and services sectors are both growing – though the latter, which contributes about 80% of total GDP, is still growing at well below its historical rate – 0.4%, compared with 0.8% in the years before the financial crisis.
And that brings us to the broader concern.
While these figures are stronger than the City had expected, they are nonetheless, considerably weaker than the UK’s normal, trend rate of expansion.
Normally you’d hope for the economy to grow by about 0.7% a quarter.

Image: Export growth has lagged expectations despite the significantly weaker pound
It hasn’t achieved anything like that since late 2015. Indeed, these figures mean Britain has had the worst three quarters since 2013, and the worst first three quarters of a calendar year since 2009.
One question economists will be asking themselves is whether this is the new normal: is Britain transitioning to a lower normal rate of growth? If so, that would have enormous consequences for all of us.
Weak growth means less income shared among us, which means less prosperity and (a worry for the Chancellor) less tax revenue. And less tax revenue in turn means the potential for more austerity.
At present the majority of economists and investors expect the Bank of England to raise interest rates to 0.5% at their meeting next week – the first increase since the financial crisis.
The fact that GDP is going up faster than anticipated will only increase the likelihood – after all, a stronger economy implies more inflation which puts pressure on the Monetary Policy Committee to lift interest rates.

Source: Sky News