Boost in UK trade ensures robust growth

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The economy grew at a robust 0.8 per cent in the third quarter as a surprise boost from trade offset a slowdown in consumer spending and investment.

The pace of recovery in the third quarter was unrevised from the initial
estimate a month ago, and suggests that, throughout the middle of this year, the economy bounced back
rapidly. But figures on spending in the UK during the quarter, released on Wednesday, still leave a question mark over some parts of the economy.

Most promisingly, net trade offered a surprise boost to the economy in
the third quarter, making up 0.4 percentage points of growth – half of the total – as exports increased by more than expected and imports of government services were revised down sharply.

Improving trade figures offer hope that foreign demand for British goods and services can offset some of the pain of government cuts, after a disappointingly slow impact on exports from the fall in the pound during crisis.

Gross value added at basic prices – a measure of growth that cuts out the effect of tax changes such as the rise in value added tax – was 4.8 per cent compared with a year earlier. That is very close to the
5 per cent growth in nominal demand that the Bank of England has said it would like to see.

Meanwhile government spending is growing more slowly than that in the private sector.

Market sector gross value added, a key piece of data for the Bank which covers 75 per cent of the economy that is mostly outside the public sector, rose by 1 per cent in the quarter, compared with the 0.8 per cent economy-wide growth.

It is figures such as these that encouraged Andrew Sentance, a member of the Bank’s monetary policy committee, to call for a rise in interest rates to underline the Bank’s commitment to bringing down the rate of inflation, which is still above 3 per cent.

He noted in a speech on Wednesday that interest rates had remained at 0.5 per cent since March 2009 – the longest period without changing since 1951.

But at least some of the apparent strength of the recovery looks fragile.

Although growth has been widely spread across all sectors of the economy, the construction industry has contributed an outsized portion of growth so far
this year. With output nearly back to pre-recession highs, this is unlikely to continue.

Although there are tentative signs that trade is beginning to deliver the hoped for boost, domestic demand is weakening even before the cuts bite. Household spending grew 0.3 per cent in the last quarter, half as rapidly as in the second quarter.

Finally, the other leg of the hoped-for rebalancing in the economy has yet to materialise. Business investment has barely budged this year, in spite of record levels of spare cash at companies, in a possible reflection of how cautious companies are about UK growth prospects.

On the other hand, after a drop of nearly a quarter in business investment, a bounceback is likely at some point.

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