UK: Economy exits recession with 1% third quarter growth

THE UK climbed out of its double-dip recession between July and September as gross domestic product rose by a bigger than expected 1% after a 0.4% decline in the previous quarter, the Office for National Statistics said today.

The increase in gross domestic product (GDP), a broad measure for the total economy, ended a run of three consecutive quarters of declining output.

City experts had expected a rise of 0.6% and the published figure is the biggest increase since the third quarter of 2007.

The largest contribution to the surge came from the powerhouse services sector, which makes up around 75% of the total economy and grew at 1.3%, following a 0.1% drop in the previous quarter.

However, the bounce-back was largely driven by one-off factors, the ONS warned, such as clawed-back activity lost to the extra bank holiday for the Queen’s Diamond Jubilee and a slight lift from the Olympics.

The third quarter had one more working day than the previous quarter, due to the Queen’s Diamond Jubilee, which would have affected the estimate, the ONS said.

The London 2012 Olympics and Paralympic Games are also likely to have impacted economic activity in the third quarter, the ONS added.

Most Read

Olympic ticket sales alone increased GDP growth in the period by 0.2 percentage points, while the event is likely to have lifted a range of other services including employment agencies, creative arts, office administration, accommodation and food and beverages.

Industrial production increased by 1.1% between July and September, the ONS said, following a 0.7% decline in the previous quarter.

Manufacturing contributed the most to the increase in industrial production, followed by water and sewerage industries.

The construction sector remained under pressure in the third quarter, however, shrinking 2.5%, following a 3% drop in the previous quarter.

Within the services sector, the index of distribution, hotels and restaurants rose 1.6%, transport sector grew 0.8%, business services and finance increased 1% and government services lifted 1.6%.

Vicky Redwood, chief UK economist at Capital Economics, said: “We think that the reversal of the Jubilee effect probably added about 0.5%, the Olympic ticket sales added 0.2% and there may have been a wider Olympic boost.

“But even accounting for this suggests that underlying output managed to rise by a small amount – an improvement on recent quarters.”

However, she added: “It won’t be plain sailing from now on, though. There are still a number of constraints on the recovery. And as the Olympic effects unwind, it is still possible that the economy will contract again in Q4.

“Indeed, the business surveys have been painting a slightly gloomier picture, suggesting that underlying output is still stagnating or even falling slightly.”

Nevertheless, she said the strength of the improvement during the third quarter could tip the balance towards the Bank of England’s monetary policy committee postponing the next round of quantitative easing, although even if held fire in November more asset purchases were still likely at some point.

“The Chancellor is also likely to jump on the numbers as vindication for sticking with his Plan A, suggesting that a significant change of course in December’s Autumn Statement might now be a bit more unlikely,” she added.

The third quarter figure means that the economy has grown 0.3% so far this year but it is still 3.1% below its peak in the first quarter of 2008, before the post-financial crisis recession first hit.

The economy shrank 0.4% in the second quarter, confirming the double-dip recession as the longest since the 1950s.

The UK has been battling against sluggish consumer spending, Government cuts and high unemployment, while the struggling eurozone has hit exports.

Even though underlying growth is considered to be weak, analysts said the recovery had been helped by lower inflation, recent gains in employment and an edging up of earnings growth.

The economy is expected to continue growing in the fourth quarter from October to December but at a much slower rate, with predictions coming in around the 0.3% mark, although some economists warn that continued growth is by no means certain.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The economy is far from out of the woods, with further relapses highly possible in the face of still tough domestic and global, especially Eurozone, conditions.

“So it is premature for the Chancellor to contemplate singing in his bathtub.”

Today’s ONS figures are preliminary estimates and subject to revision.