Growth is the Key

Welcome news today that the UK economy grew far more rapidly than expected in the third quarter. Real GDP (the total output of the economy) increased by 0.8 per cent and was 2.9 per cent higher than in the third quarter of 2009, according to figures released today by the Office for National Statistics.

Economists had expected an increase of just 0.4 per cent.

Growth in the second quarter was 1.2 per cent, though this was boosted by a recovery from the effects of the bad weather which depressed activity in some sectors in the early part of the year. Over the last three quarters, growth has averaged 0.8 per cent, or an annual rate of 3.2 per cent and this is as good an estimate as any of the underlying trend in recent quarters.

If we go deeper into the numbers growth is being led by an extraordinary surge in activity in the construction sector, where output has increased by 12.9 per cent in the last three quarters. But there have also been healthy recoveries in activity in two other sectors: manufacturing (up 4.1 per cent over the same period) and business services and finance (up 2.4 per cent).

Output in all other sectors has grown less rapidly than overall GDP and that of the service sector as a whole increased by only 1.4 per cent over this period.

The emphasis of the Labour opposition has been to maintain this growth. Ed Miliband as Labour leader emphasised the need to nurture growth and most importantly of all; support small and medium sized businesses by encouraging bank lending and by maintaining consumer confidence and support.

The fact is that the budget cuts announced by Conservatives have not yet hit the economy. The announcement came last week, and will take at least six months to come through to the front line. The £6bn cuts in June were insufficient to damage the economy but may have depressed the construction figures to a small extent.

The real growth numbers to watch will be in Q4 2010 and Q1 & 2 2011. If these numbers are sufficiently down on the current growth numbers then we know that George Osborne has failed to take into account the state of the global economy before progressing with aggressive cuts, which in the eyes of the public could hurt consumer sentiment and small business.

The concern of this blogger is that if growth in construction, manufacturing and finance slows – which is what has happened in the US, and the UK economy appears to be following one or two quarters behind the US economy – overall growth rates are likely to be lower in 2011. This is particularly the case if public spending cuts and January’s VAT rate hike have a negative effect on activity

Add in the Osborne cuts to the public sector at the same time and there you have the big economic gamble. Labour argues an unnecessary economic risk with social consequences on the most vulnerable in our community.

The Office for Budget Responsibility, are forecasting a decline in growth. But then most economists thought growth would be a lot lower in the third quarter too, so what do they know? What do I know?

For now, those who are most optimistic about the UK economy – and who believe that it can cope with the massive fiscal tightening being imposed by the coalition government – have some evidence to support their case.

This blog would urge caution. It is far too early to make that judgement. George has received a welcome boost today, but this is before his actual policies even start to bite.