November 27, 2013 / 9:45 AM / 6 years ago

Consumers drive British growth again, but business investment up too

LONDON (Reuters) - Britain’s economic growth broadened a bit in the third quarter of 2013 as companies increased investment but strong consumer spending remained the main driver of growth, leaving the recovery still vulnerable.

Shoppers cross Oxford Street in central London August 15, 2013. REUTERS/Toby Melville

The economy expanded at its fastest pace in more than three years as gross domestic product between July and September grew by a quarterly 0.8 percent, details of earlier official data confirmed.

In year-on-year terms, growth was 1.5 percent, the Office for National Statistics said, also unchanged from a preliminary estimate last month.

Britain’s economy has surprised even the government with the pace of its recovery this year. Its annualised growth rate of more than 3 percent puts it ahead of other rich countries, buoying Chancellor George Osborne a week before he is due to deliver a half-yearly budget statement.

But unlike countries such as the United States and Germany which have recovered fully from the financial crisis, it remains 2.5 percent smaller than its peak in early 2008.

Sterling jumped to an 11-month high against the dollar after the GDP numbers which investors took as a confirmation that the British economy was firmly in recovery mode.

However, the data also underscored the difficulty of getting the economy onto a sounder footing through exports rather than domestic demand. Britain’s wide trade deficit knocked 0.9 percentage points off GDP growth in the third quarter.

Economists also pointed to a strong build-up of inventories on company shelves.

“Most of the heavy lifting is coming from the consumer and stock building. That is not a great long term prospect for growth,” said Alan Clarke, an economist at Scotiabank.

By contrast, consumer spending, which accounts for nearly two-thirds of Britain’s economic expenditure, rose by 0.8 percent, its fastest pace since the second quarter of 2010.


Economists took some encouragement from business investment, which rose 1.4 percent in the third quarter from the previous three-month period.

That represented a recovery from a nearly 3 percent fall in the second quarter but was still below average.

Bank of England Governor Mark Carney has said a pickup in business investment is crucial if Britain’s economic recovery is to get on a firmer footing. On Tuesday he said he expected a stronger increase in investment by firms only next year.

Carney also said he and other BoE officials were not happy with the reliability of the ONS data on business investment.

Osborne is expected to announce stronger growth estimates and lower borrowing projections on December 5. He is also likely to stick to his plan to bring down Britain’s budget deficit, rather than lavish money on voters ahead of the 2015 elections.

A group representing British manufacturers said Wednesday’s investment numbers showed the sector needed help from Osborne, especially on rising electricity costs, in order to have more confidence about pumping more money into their businesses.

“Next week’s Autumn Statement must send out a powerful signal that government will continue to act on delivering a competitive business environment,” Lee Hopley, EEF’s chief economist said.

Industrial output rose 0.6 percent on the quarter and construction was up 1.7 percent, less than first estimated.

Britain’s vast services industry grew by 0.7 percent in the third quarter, in line with the preliminary estimate. But the new data showed growth tailed off at the end of the quarter, with monthly expansion of just 0.2 percent in September.

Economists say Britain’s is unlikely to grow faster in the third quarter. Wages are lagging inflation, the government is planning more belt-tightening and Britain’s trading partners in the euro zone are struggling to get out of recession.

Wednesday’s figures showed that compensation to employees rose just 0.4 percent in the third quarter, while business profits surged by 5.2 percent.

Data from the Confederation of British Industry, also released on Wednesday, showed retail sales stagnated for a second month in November, with stores blaming unseasonably mild weather for low demand for winter clothing.

Editing by Jeremy Gaunt

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