Third quarter growth figures will change the terms of political debate for George Osborne, but investment remains sluggish.
This 0.8pc rise in GDP for June to September is the highest quarterly increase in three years, so the economy is clearly moving in the right direction. That’s got to be good news for commercial and employment prospects across the UK, but I still have some big reservations about the pace and shape of this recovery.
On the plus side, we’ve now had three successive quarters of growth, which will do a lot to change the terms of the political debate. Chancellor George Osborne will no doubt claim that his “austerity” policies have been vindicated, given that the UK now seems a long way from recession – and, indeed, within seconds of these numbers being released, he tweeted that the economy was “on the path to prosperity”.
Osborne will also be pleased to have proved the International Monetary Fund wrong – given that earlier this year the Washington-based Institution criticised the UK’s policy mix. Since then, in fact, the IMF has upgraded its growth estimate 2013 as a whole to 1.4pc, from 0.9pc back in July.
Other key 2013 growth forecasts will now also certainly be upgraded. The Bank of England currently estimates 0.5pc growth for this year, with the Office of Budget Responsibility foreseeing a 0.3pc national income rise. A higher forecast, in particular, will flatter the fiscal numbers, possibly giving the government more room to offer the electorate some spending tidbits as campaigning intensifies in the run-up to the 2015 general election. This could become apparently as early as the December 4th Autumn Statement.
In terms of the breakdown of today’s numbers across the four main sectors, agriculture expanded 1.4pc during Q3 and construction surged 2.5pc (the highest quarterly increase in that sector since early 2010. Industrial production, meanwhile, was up 0.5pc and the service sector grew 0.7pc compared to the quarter before.
Having said that, the ONS confirmed that the UK economy remains 2.5pc smaller than its pre-crisis peak. So we are still experiencing the slowest recovery in modern British history. Five years on from the slump of the early-1980s and early-1990s, the economy was 4-6pc larger. One reason for this slow rebound is our flagging external sector. The UK ran a £10bn trade deficit in August, after 2012 saw the biggest shortfall of exports over imports in 34 years – and this despite a 20pc fall in sterling against our main trading partners since 2008.
The Coalition’s political crowing about the UK’s return to “sustainable growth” will continue for weeks and even months. But I’d say that inflation remains a rather significant fly in the ointment. Yesterday, amidst a slew of upbeat industry surveys looking forward to today’s buoyant growth number, not least from the CBI, a monthly YouGov survey showed a sharp uptick in inflationary expectations. The median expectation for inflation rose to 3.2pc this month, compared to 2.5pc in September – possibly influenced by the recent political focus on higher energy prices.
This will concern the Bank of England, given that rising inflationary expectations can become self-fulfilling. Perhaps more worrying were the expectations numbers relating to the 5-10 year outlook for prices pressures. Consumers now foresee a 3.9pc average annual inflation rate over the next decade, up from 3.3pc in September.
One of the Bank’s “knock-outs” – which would lead it to abandon earlier “forward guidance” and raise base interest rates from their current historic low of 0.5pc – is that “medium-term inflation expectations no longer remain sufficiently well-anchored”. So speculation that rates could soon rise are likely to intensify in the months to come, adding further complexity to the policy conundrum faced by both the government and the Bank’s Monetary Policy Committee.