Growth data paint more secure picture

The UK economy grew by 1.2 per cent in the second quarter, according to official data that paint a picture of a more secure recovery than had previously been thought.

The economy grew at its fastest since 1999, revised estimates confirmed, with business investment healthier and consumer spending resilient.

Economists had been concerned by earlier calculations suggesting that much of the strong growth in the quarter came from companies rebuilding stocks after depleting them during the recession, a process that provides only a short-lived boost to growth.

But the new figures show that rebuilding of inventories added only 0.4 percentage points to the headline growth number, rather than the 1 percentage point at first thought.

Instead, business investment rose by 0.7 per cent rather than an initial estimate that it had fallen, while fixed investment increased for the second quarter in a row thanks to a jump in housebuilding.

Business investment is seen as a key motor for the recovery because a combination of investor’s fear and lack of credit helped to drive investment down unusually sharply during the recession.

“There was some encouraging news on the investment side,” said David Owen, economist at Jefferies, which made it look like “more of a genuine recovery”.

Demand in the economy was also supported by fairly strong consumer spending. Consumers’ belief that the fall in their incomes was temporary meant they ran down their savings.

Investment in financial assets such as savings accounts, bonds and shares was flat compared with a normal level of about 10 per cent of gross disposable income, according to Mr Owen. The household saving ratio fell to 3.2 per cent in the quarter from 5.5 per cent in the first quarter – much lower than forecast by the Office for Budget Responsibility. Excluding pension contributions, the saving ratio was 1 per cent, getting close to pre-recession lows.

The fall in savings is likely to please Charlie Bean, deputy governor of the Bank of England, who said in an interview filmed three weeks ago but screened on Monday that he hoped loose monetary policy would spur consumption.

Separate data from the CBI indicated that retailers saw exceptionally strong demand in September, with the largest proportion since 2004 reporting that sales were rising rather than falling. Although growth was strong in the second quarter, however, the temporary nature of some of the sources of activity still provides a cause for concern.

Demand was supported by government spending on services, which rose by 1 per cent.

Meanwhile, construction output increased at the most rapid pace since 1963, boosted by projects delayed from the first quarter because of snow and a pre-election public sector development push.

The fall in savings cannot continue indefinitely and stronger spending now means less room for increased demand next year, when public sector cuts bite more sharply. Mr Owen said: “At some point households have to raise savings back to a more realistic level.”