UK economy surges out of recession – but for how long?

Third quarter included ‘Olympics effect’ and analysts warn that economy could contract in fourth quarter

LAST UPDATED AT 10:06 ON Thu 25 Oct 2012

THE UK economy surged out of recession between July and September posting its best performance since the credit crunch. The Office for National Statistics says that GDP grew by 1 per cent – the fastest rate since September 2007.

The strongest sector was services, which expanded 1.3 per cent. Industrial output also increased, by 1.1 per cent, but construction output fell by 2.5 per cent. Ticket sales for the Olympics were included in the data, which is thought to have added 0.2 per cent to GDP. The third quarter also benefitted from a rebound from the second quarter, when an extra Bank Holiday around the Queen’s Diamond Jubilee and the terrible weather adversely affected the economy.

The figure announced today is an estimate, and could be revised down later this month, when a second guess is released based on more data.

Chancellor George Osborne was cautiously optimistic. "There is still a long way to go but these figures show we're on the right track and are a sign the economy is healing,” he said.

"We've cut the deficit by a quarter, over 1 million jobs have been created in the private sector, inflation is down and the economy is growing.”

But he warned: "Yesterday's weak data from the eurozone were a reminder that we still face many economic challenges at home and abroad.”

Shadow Chancellor Ed Balls said: “A one-off boost from the Olympics is welcome. But it is no substitute for a plan to secure and sustain the strong recovery that Britain desperately needs if we are to create jobs, get the deficit down and make people better off.”

Analysts chimed with the cautious note, some of them warning that the British economy could return to negative growth in the final quarter.

Vicky Redwood of Capital Economics said: "It won't be plain sailing from now on. As the Olympic effects unwind, it is still possible that the economy contracts again in Q4.”

Economist Amit Kara from UBS pointed out that the big GDP growth has merely cancelled out the past year’s economic contraction. "It's good news that we wiped out all the output loss from the previous three quarters, but it's obvious that the bounce back is because of one-off factors,” he said. “As such, the underlying story is still very weak. What's also slightly concerning is the output loss on the construction sector this year."

The Daily Telegraph’s Philip Aldrick believes that removing one-off factors, the UK economy is actually bumping along at a growth rate of about 0.2 per cent per quarter – well below the 0.5-0.6 per cent considered desirable.

The trouble is that “no one is buying – not the state, not the foreigners, and not the shoppers”. There are reasons to be positive, however. “People have held on to their jobs, and – with inflation falling – the three-year squeeze on households is easing. Households are paying off their debts, and there is even the prospect of a recovery in consumer spending next year as the overall level of disposable income rises.”

Alex Hern, on the News Statesman’s Staggers blog, says we’re “emphatically not out of the doldrums yet”, pointing to the fact that the UK economy is still yet to return to the size it was in 2008.

Alan Clarke of Scotiabank told the Telegraph that despite the caveats surrounding the Olympics, the GDP figure is good. He suggested that the Bank of England might feel under pressure to stop printing money – its quantitative easing programme. “There's now a good chance the economy won't actually contract on average for this year. I would be surprised if we're on the right side of zero. It'll probably be flat and in the context of monetary policy, it reinforces the case for the Bank of England to pause on QE.” · 

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Doesn't seem much of a surge!

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