Helped by a boost from spending on the Olympic Games which directly added 0.2% growth, the UK economy has emerged from the recession that has dogged it since 2008.
Total UK GDP grew by 1% in the last quarter, which is a good 400 basis points above expectations but the boost from the Olympics will not be repeated in the next quarter and continued growth is expected to be shallow. Indeed some commentators are even downplaying the 1% growth: Andrew Smith, chief economist at accountancy group KPMG, commented, "It's not exactly a recession, but not exactly a recovery either”.
The figures were also flattered against the previous quarter because it lost some output due to the extra public holiday for the Diamond Jubilee in June.
The service sector was a strong performer estimated to have grown by 1.3% between July and September, after shrinking by 0.1% in the three months before. But this was moderated by construction which continues to languish in the doldrums with a 2.5% decline in the same quarter thought to be largely due to a decline in housebuilding and government spending.
Also on the good news front unemployment fell by 50,000 to 2.53m in the three months to August, reducing the jobless rate to 7.9% from 8.1%; the number of people in employment now stands at 29.6 million [71.3%], the highest rate in over 40 years.
Retail sales also rebounded in August as average earnings increased by 1.7% in the year to July, which was a small increase from the previous month. Inflation has declined to 2.2% [CPI] although massive hikes in energy prices, continuing high petrol prices and global crop failures pushing up the price of food may reverse the trend. Nevertheless, the British people are more confident about their future financial prospects than they have been for 15 months.
Consumer confidence will become more critical in the coming months. The latest CBI survey suggests that manufacturers have had their worst three months for three years and the strengthening pound will not help. This means that the UK's continued move out of recession will largely be dependent on retailers over the Christmas trading period.
ECONOMIC PARTNERSHIP COMMENT
Both the end of recession and the employment/unemployment figures are excellent news but forces beyond our control still leave the UK economy dangerously fragile.
The 4% annualised rate of growth suggested in the last quarter will not be sustained and the general consensus is that GDP will grow by about 1% per annum this year and next against an historic trend rate of about 2.5%.
The increase in average earnings of 1.7% in the year to July could be enhanced further if inflation continues to fall and this could boost real wages and consumer confidence already showing some early signs of recovery from four years of hardship. It is encouraging for the economy, if not the environment, that the UK is the only major car market in Europe to be growing rather than dramatically shrinking; 14% down in France, 26% down in Italy and a whopping 37% down in Spain.
But European car sales also tell a story about the UK’s ability to trade its way into further growth. Europe is our biggest trading partner but exports are directly affected by the weakness in the Eurozone and total exports to Europe have fallen by 4.5% over the past year. Even the outlook for the German economy has weakened in recent months leaving only Scandinavia reporting decent growth.
Europe will weaken further before it starts to improve and the UK does not have sufficient links to the emerging economies like China and India to compensate, although it is desperately seeking to make them.
So some good news on the home front but we need to hope for a good Christmas on the high street and in the short term watch out for further weakness in Europe and in the medium term work like stink to identify opportunities in the East.
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