UK springs a surprise, GDP rises better-than-expected 0.8% in Q2

LONDON: UK’s economy grew at 0.8% in the third quarter, taking analysts and markets by welcome surprise. At double the consensus estimate of 0.4%, the figures eased some of the fears that Britain’s economic recovery will not be able to cope with the spending cuts recently announced by the government. Though lower than the second quarter’s 2%, the Office of National Statistics said that given poor weather earlier, the underlying growth in both quarters “was broadly similar.” On the year, GDP grew by 2.8 %, the fastest annual rate in 3 years. Construction was the main driver for growth this quarter.

Thanks to the robust performance, the prospect of further quantitative easing, or printing more money, by the Bank of England receded, and the sterling went up in response, while equity and bond markets fell. S&P revised UK’s outlook from ‘negative to ‘stable’, and retained its triple A rating. “This gives me confidence that although global economic conditions remain choppy, a steady recovery is under way,” Chancellor George Osborne told the media, on a day when some opinion polls showed Labour inching ahead in popularity.

UK’s economic community greeted the good news warily, with most expecting a sharp slowdown ahead as the impact of public sector cuts impact the economy.

“The ONS will doubtless revise these data, nevertheless, for now, these data should be enough to calm worries about possible double-dip and to give reassurance that the economy can withstand the fiscal consolidation programme,” said Michael Saunders of Citibank, though he expects economic growth to be volatile in the next few quarters.

PwC’s chief economist John Hawksworth said that while reports of the death of the UK economy were exaggerated, strong construction sector growth, which has been the main driver for this quarters robust figures, is “unlikely to be sustained given the sharp cuts coming in public sector capital spending.”

Businessmen are still not sure that the private sector will be able to make up the growth that is needed to take up the slack from the public sector cuts. The Institute of Directors, which represents small businesses, pointed out that that insufficient money supply remains a risk to the economy. “The key question is will it last and that’s where the IoD is more cautious. The economy is about to sail through choppy waters and it would be a mistake to focus all our attention on fiscal policy,” Graeme Leach, Chief Economist at the IOD said. The consistently surprising growth rates however, has made fears that the economy will tip back into recession seem more remote.