The UK economy exited recession in the third quarter, but underlying growth is much weaker than the 1% headline figure.
Preliminary data show that real GDP rebounded by 1% quarter on quarter in July-September, bringing an official end to the UK's double-dip recession. The third-quarter growth rate was the strongest in five years, but it received a significant boost from one-off factors that will unwind in the coming months.
The rise in output was driven by the UK's dominant services sector (which accounts for almost 80% of GDP), which grew by 1.3% over the quarter, having stagnated since late 2011. Industrial production also posted an impressive gain of 1.1%, after five consecutive quarters of contraction. The construction sector continued to fare poorly, with output declining by 2.5%.
The beleaguered coalition government has enjoyed a rare and welcome boost from the preliminary GDP figures, which exceeded expectations for the first time in a while. Consensus had been for growth of around 0.6%. The fact that the UK economy is officially expanding can only be good news for wider confidence, but the reality is that the numbers once again included many caveats, and a warning that the underlying condition of the economy is nothing like as robust as the headline figure suggests.
The first caveat, as always, is that preliminary estimates from the ONS are often subject to revision. Moreover, the last two quarters' GDP data have been significantly distorted by the impact of the changed pattern of public holidays for the Queen's Jubilee in June, which resulted in one fewer working day in the second quarter than in the three months to September. It is quite likely that output was depressed further around the time of the Jubilee as many people opted to take extended holidays. The Office for National Statistics (ONS) has estimated that this knocked 0.4-0.5 percentage points from the second-quarter GDP growth figure, and the assumption is that the third-quarter data received a similarly sized one-off artificial boost. There was also a temporary Olympics-related bounce for the third-quarter GDP figures, primarily from ticket sales; although tickets were sold in tranches between early 2011 and mid-2012, the impact was allocated in its entirety to the July-September national accounts. According to the ONS, this added at least 0.2 percentage points to GDP.
Thus, a more realistic assessment of economic growth since April 2012 is that output has expanded at a quarterly rate of around 0.2% - a reasonable performance given the numerous headwinds pummelling the economy, but still subdued given the scale of the earlier decline and in contrast to the performance of other major developed economies such as Germany and the US. Despite the third-quarter boost, GDP is at the same level as a year ago and remains 3.1% below its early 2008 peak (in contrast, output in Germany and the US had recovered to above its pre-crisis levels).
Moreover, the near-term outlook remains as uncertain as ever. The UK is still mired in a severe and protracted balance-sheet recession following the collapse of a huge debt-financed asset bubble, with important financial and trade links with Europe depressed by the protracted euro zone crisis. Domestic survey evidence during October points to still weak investment and faltering industrial demand, while household incomes face another squeeze as inflation rebounds in the coming months from its September low. After the third-quarter bonanza, the UK economy will do well to record any growth at all in the final three months of this year. For some time now our forecast for UK GDP growth in 2013 has held steady at a very subdued 0.5%.
Like the government, we can cross our fingers in the desperate hope of a more positive upswing, but a backdrop of continued fiscal retrenchment, private-sector deleveraging, rising energy costs and a still dysfunctional banking system point to another year of disappointment.