UK Growth Figures Narrowly Beat Expectations In Third Quarter

11/01/2011 06:01 am ET | Updated Jan 01, 2012

The UK's growth figures have shown a surprise rise in the third quarter of 2011, with the country's gross domestic product (GDP) rising 0.5%, defying expectations, according to the Office of National Statistics (ONS). The output of production, construction and service industries all rose in the quarter.

The country has been teetering on the edge of a second recession since 2009, and although the third quarter's figures beat forecasts, analysts have been quick to pour cold water on the chances of a nascent recovery. Growth in the second quarter was 0.1%, and Tuesday's numbers are likely to be a technical bounce following a poor spring and summer.

"Special factors", including the Royal Wedding and the Japanese tsunami depressed growth earlier in the year, but weak growth has continued as business confidence remains low.

The unfolding eurozone crisis has weighed on companies' investment decisions and held back expansions. Likewise, the supply of credit into the economy has been dented by ongoing concerns about the capital levels at banks.

The government's deep public sector cuts are also widely believed to be having an impact, denting both real income levels and sentiment.

The eurozone crisis is unlikely to be resolved imminently. Although markets bounced high after a 4am deal to 'save' the euro last week, the Greek government threw a spanner in the works last night by proposing that its rescue package - which includes a 50% write-down on its debt - goes to a referendum.

Markets slid in early trade following the announcement. The German DAX fell by 3.84% and the French CAC40 slid 3.71%.

In a soundbite-laden interview on the BBC, Chancellor George Osborne said that several times the figures were "a positive step", but warned that the economy had "a difficult journey from the debt-filled past" and repeated concerns that the eurozone would make that "journey" more difficult.

Graeme Leach, Chief Economist at the Institute of Directors, said: "You can’t see the road ahead from the rear-view mirror: today’s GDP figures are welcome news, but they fail to capture the dramatic events of recent weeks in the eurozone.

"GDP growth is almost certain to flatten off, or even fall, in the fourth quarter of this year due to postponed business investment and consumer caution, even if the eurozone crisis stabilises.

"Unfortunately we don’t think the crisis is over, it will continue to haunt recovery prospects in the UK."

Such a weak recovery is unlikely to make a dent in the UK's growing jobless numbers. October numbers showed nearly 2.6m people out of work, which has been growing since the recession.

"This good news does not disguise a labour market which has been in freefall over recent months, and it is worrying to see government services making the most significant contribution to growth," Andrew Sissons, a researcher at the labour market think tank The Work Foundation, said.

"The UK is far from out of the economic danger zone. The greatest threat is of stagnation or low growth over the next year or two, which would most likely lead to further increases in unemployment, and would make it much harder for the government to control the budget deficit."

The Bank of England injected £75bn into the financial system in October to try to free up capital for lending to business and kick-start growth. The bank is understood to be willing to undertake a further round of so-called "quantitative easing" in the New Year, should growth remain off-track.

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