GDP upgrade hints at coming recovery

 

The economy shrank by 0.2 percent in the third quarter, only a fraction less than previously thought, but a long-awaited rise in household spending suggests the 18-month downturn may be nearing an end.

Although Britain is trailing most major economies in emerging from recession, analysts reckon it will rebound in the fourth quarter with growth of around 0.4 percent.

"Upward revisions to consumer spending and investment suggest that the economy is stabilising" said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club.

"The further significant draw-down of inventories means there is plenty of room for a turn in the stock cycle to support growth over the next few quarters" Goodwin added.

All but one of the 53 analysts in a Reuters poll reckon the Bank of England will halt its quantitative easing programme when the current 200 billion pound asset purchase fund, intended to help keep credit flowing, runs out in the next few weeks.

Monetary Policy Committee member Adam Posen said in a newspaper interview on Tuesday that the policy had helped stave off a deeper downturn, but noted risks to growth were still skewed to the downside.

Indeed, a breakdown of Tuesday's gross domestic product (GDP) data showed that while construction output rebounded strongly in the third quarter, the effect was negated by downward revisions to industrial and services output.

RECORD RECESSION RECEDING 

Much of the downturn has been caused by companies slashing inventories and consumers tightening their belts.

So a sharper fall in inventories of 4.6 billion pounds and a rise in the household saving ratio to a decade high of 8.6 percent suggested to some economists that the bulk of this process may now be over.

"It's an encouraging sign that the worst of the adjustment is now behind us - so the headwinds against growth in coming years from consumer deleveraging should be limited" said Neville Hill, economist at Credit Suisse.

However, others are not so optimistic. "The scything in stocks may reflect a large degree of pessimism about future demand which, if justified, could presage a rather wan recovery" said Simon Hayes, economist at Barclays Capital.

The Office for National Statistics said total economic output has fallen by 6.03 percent since Britain entered recession in the second quarter of 2008, confirming the sharpest decline since quarterly records began in 1955 and just exceeding the 6.00 percent drop between 1979 and 1981.

Britain's Conservative opposition has profited from the weak state of the economy in the run-up to a national election due by June 2010, while the Labour government is hoping that a quick rebound will improve its chances at the polls.

Activity surveys, like the CIPS/Markit purchasing managers' indices, are pointing upwards and house prices have been rising.

Unemployment in Britain has been surprisingly subdued compared with previous recessions and other major economies, which will also help.

And there were some signs in Tuesday's data that parts of the economy had already turned the corner, helped by record-low interest rates and government measures to stimulate demand. 

Household spending rose 0.1 percent between July and September, its first rise since early 2008, and real household disposable income was 1.2 percent up on the quarter and 5.2 percent up on the year, the biggest annual rise since 2001.

In another sign that the economy is shifting away from its dependence on consumption-led growth and easy credit, exports rose 0.8 percent on the quarter - the first rise in more than a year.

There was also positive news on Britain's current account deficit, which was just half analysts' expectations at 4.703 billion pounds in the third quarter.

The second quarter deficit was revised down sharply to 4.375 billion pounds from an earlier estimate of around 11.4 billion pounds due to revisions to historic data on trade in services, cross-border Value Added Tax fraud, and insurance and shipping.