Economy sees surprise growth of 0.8% in Q3

26 October 2010 | By Natalie Thomas

Allowing for the recovery in Q2 following the bad weather at the start of the year, the underlying growth in Q3 is broadly similar to that in Q2.

The growth in the third quarter is due to growth in each of the component aggregate series, namely services, construction and production.

Total services output rose 0.6% in Q3, compared with a rise of 0.6% in the previous quarter. The largest contribution to the growth in this quarter was from business services and finance and government and other services.

Jonathan Loynes, chief European economsit at Capital Economics, says the unexpectedly sharp jump in UK GDP in Q3 looks likely to delay a further bout of quantitative easing.

He says: “The 0.8% quarterly gain was double the consensus forecast and above the 0.5% rise anticipated by the MPC in the August Inflation Report. The upside surprise came both from construction output, which jumped by another 4% after Q2’s 9.5% rise, and services, which registered another solid 0.6% gain despite signs of a slowdown in the survey evidence.

“The ONS has also assumed that energy output will rise sharply in September. These numbers will clearly ease near-term concerns over a possible double-dip in the UK economy and suggest that GDP growth this year will be a bit stronger than our previous forecast of 1.5%.”

He says with inflation still well above its target, it will also probably be enough to deter the MPC from reviving its asset purchases as soon as its next meeting in November.

He adds: “Nonetheless, we do not think that they transform the outlook of a pretty weak recovery once the full effects of the fiscal squeeze kick in next year and beyond. As such, we still think that the economy will need more support from monetary policy, probably early next year.”

Brian Johnson, an insolvency practitioner at HW Fisher & Company chartered accountants, says the better than expected Q3 GDP growth is welcome but the key to the UK’s economic recovery remains getting the banks to lend, and on this front nothing has changed.

He says: “The refrain from both the Labour and Coalition Governments has been get the banks lending but neither has achieved anything of note and until this situation reverses it is hard to see how the economy will significantly strengthen.

“The economy may not collapse but right now no one knows where the growth that the Coalition Government wants to take up the slack from the public sector cuts is going to come from.

“Some 150,000 or so SMEs are still facing real difficulties and a large percentage of these are likely to go to the wall for the simple reason the banks won’t lend. The Q3 figure must be welcomed but business and consumers should remain vigilant.”

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