UK on track to be fastest growing G7 economy
The UK remains on track to be the fastest growing G7 economy this year despite new figures showing that GDP growth slowed in the third quarter.
A rise of 0.7% – a slowdown from 0.9% in the second quarter – was in line with most forecasts. But after recent economic indicators showing a weaker housing market, and slower manufacturing and consumer spending, some had feared growth could be weaker. Relief in financial markets at the figures, which confirmed seven consecutive quarters of growth, gave the pound a boost.
Economists said that while growth remained strong, it was unlikely to return to the pace seen earlier in the year. “We expect the recovery to soften a little further in the fourth quarter as the single currency area records little growth while a confluence of factors – principally the potential for rate hikes in the next 12 months and political uncertainty – drag a little on domestic growth,” said Rob Wood, chief UK economist at the Berenberg bank.
“For now it is onwards and upwards for the UK, but we worry about the downside risks in the near term.”
Nonetheless, Britain is expected to be the fastest-growing economy among the G7 nations this year, with the International Monetary Fund (IMF) predicting a GDP increase of 3.2%, compared with the US at 2.2% in second place.
The Office for National Statistics said growth in the UK’s dominant services sector slowed in the July to September quarter and manufacturing grew at the slowest pace for 18 months.
Services remained the biggest driver of growth, followed by production, which includes manufacturing. Construction growth picked up in the third quarter, chiming with reports that housebuilding is at its strongest since 2007.
Compared with a year ago, GDP was up 3%, down from annual growth of 3.2% in the second quarter.
The solid growth figure is not all good news, however, after it emerged that Britain has been told it must pay an extra €2.1bn (£1.7bn) into the European Union budget by 1 December because it is performing better than its European neighbours.
Rob Carnell, economist at ING Financial Markets, said the performance was “very respectable”, though he added: “The UK chancellor may view this as a mixed blessing, after being given a bigger bill for the EU budget thanks to the UK’s relative outperformance of its European Union peers. This will be especially irksome since despite the stronger growth figures, there has not yet been an accompanying improvement in the UK public finances to match.”
George Osborne welcomed the latest figures, but was quick to point to pressures from outside the UK weighing on business activity.
“The UK continues to lead the pack in an increasingly uncertain global economy … But the UK is not immune to weakness in the euro area and instability in global markets, so we face a critical moment for our economy,” the chancellor said.
The shadow chancellor, Ed Balls, said most people were still not feeling the recovery, with wages falling in real terms and now a “concerning slowdown in economic growth too”.
Business groups have warned that manufacturers in particular are being hurt by strains in the eurozone, where some economies are contracting and others are grappling with deflation. The manufacturers’ organisation EEF said the sector was still on track to grow at its fastest pace since 2010 and domestic demand remained healthy.
However, EEF senior economist Felicity Burch said: “Today’s estimates confirm the economy has slowed, with little surprise that export-intensive sectors have been most affected. After strong growth in the first six months of the year, the pace of growth in manufacturing has also slackened as a result of weaker demand from key markets including Europe and China.”
Taken as a whole the UK’s economy is now 3.4% above its pre-crisis peak in the first quarter of 2008. But in a blow to the government’s ambitions to secure more balanced growth, it is only the services sector that has exceeded its pre-crisis peak. Manufacturing and construction still have some way to go to make up lost ground, the ONS confirmed on Friday.
The economy also remains below its pre-crisis level when measured by head of population.
John Hawksworth, chief economist at PwC, noted the population has grown faster than GDP since the downturn.
“Average GDP per person is therefore still around 1% lower in real terms than before the recession, which helps to explain why many people may feel that there is some way to go before the downturn is truly over,” he said.