December 22, 2011 / 9:36 AM / 9 years ago

Better third-quarter growth masks recession risks

LONDON (Reuters) - Britain’s economy unexpectedly grew faster than first thought between July and September, official figures showed, but they also revealed that growth was on shaky foundations and analysts said the economy may be about to slide into recession.

Women sit outside a coffee shop in Largs, Scotland July 16, 2011. REUTERS/David Moir

The Office for National Statistics revised up third-quarter GDP growth to 0.6 percent on the quarter from an earlier estimate of 0.5 percent, but it revised down its second-quarter estimate to show the economy stagnated between April and June.

Analysts said Thursday’s figures did not change their view that the economy was set for a sharp slowdown due to the deepening euro zone crisis, which threatens to wreak havoc in Britain’s biggest export market.

“Our expectation is that the UK is about to undergo a short recession,” said Philip Shaw, economist at Investec. “It’s pretty clear that 2012 is going to be a challenging year.”

Last month Chancellor George Osborne had to announce extra austerity measures after the independent Office for Budget Responsibility slashed its 2012 growth forecast by more than half to just 0.7 percent.

The upward Q3 revision was driven by firms building up stocks rather than selling to consumers at home or abroad.

Output by the services and construction sectors was revised up, but industrial output was cut in half. Growth was further undermined by a record trade deficit, which subtracted 0.4 percent from GDP.

A sharply deteriorating growth outlook and worries that the euro zone debt crisis will tip Britain back into recession encouraged the Bank of England to restart its quantitative easing programme in October.

The central bank has left the door open for further stimulus in February, and most economists reckon it will inject as much as 75 billion pounds on top of the 75 billion it added in October.

“It remains odds-on that the BoE will undertake further QE early in 2012 to try and boost the struggling economy,” said Howard Archer, economist at IHS Global Insight.


Policymakers had been counting on a weak pound helping Britain to export its way to recovery, but crumbling confidence in the euro zone has hit demand for British goods.

The ONS said the current account deficit more than doubled in the third quarter to 15.226 billion pounds — the highest since quarterly records began in 1955, and the biggest as a share of GDP since 1990 at 4 percent.

The deterioration was driven by a record goods trade deficit of 27.569 billion pounds, as well as a 90 percent drop in investment income on the quarter.

Economists drew some comfort from the fact that British growth was less reliant on government spending than previously assumed, with an increase in gross fixed capital formation -which includes business investment - substituting for growth in government spending.

Third-quarter business investment was revised up to show growth of 0.3 percent compared with an earlier estimate of a 1.4 percent fall.

Household spending was flat on the quarter - the first time in a year it has not fallen - and real household disposable income rose 0.3 percent.

The Bank of England expects that to rise further next year, when inflation is seen falling sharply, easing the squeeze on household finances.

Still, the figures also showed that Britons upped their savings to 6.6 percent of income — its highest in almost a year.

Editing by Anna Willard

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