UK economy expanding at same rate as when coalition came to power

The economy has regained the pace of growth inherited by the government when it came to office in 2010, according to a leading economics institute.

The National Institute of Economic and Social Research (NIESR) said GDP growth hit 0.9% in the three months to the end of August, up from 0.7% in the three months to July.

The last time the economy was expanding at this rate, the coalition had announced its first budget and was about to impose a five-year austerity programme.

The NIESR, which produces its own estimate of GDP ahead of official figures, said the economy was still 2.7% smaller than in 2008 and warned that the current turnaround in Britain's fortunes would wane slightly as the world economy slowed towards the end of the year.

"Looking ahead, the rate of growth will likely soften, somewhat, over coming quarters," it said. "The external environment in the guise of weak demand from the euro area and slowing emerging markets will likely limit the rate of the UK's economic expansion."

A slowdown in foreign markets played a part in Britain's worse than expected trade deficit in July, though manufacturing made gains in line with improvements in Britain's domestic performance.

Official figures showed that factory output increased for the second consecutive month in July, up 0.2% on June.

The Office for National Statistics (ONS) said the recent spurt of activity was largely due to a turnaround in machinery and steel production, but was not enough to offset falls dating back to last year when the government's austerity policies were hitting consumer confidence and the euro crisis was at its height.

Since last June, industrial production has tumbled 1.6% over the last year. A decline in the production of steel and other metals dragged the manufacturing sector down by 0.7%, adding to falls in North Sea oil output that have hit the broader figures for several years.

The recent rise in manufacturing has been welcomed by George Osborne as a sign that his economic policies are bearing fruit. But he is likely to be dismayed by trade figures from the ONS showing that the UK's recent growth has pulled in a record volume of imports and more than doubled the trade deficit to £3.1bn.

Imports rose to £104.2bn in the three months to July, a 3.1% increase, while exports to the EU remained flat and the trade in goods to countries outside the bloc fell sharply.

David Kern, chief economist at the British Chambers of Commerce (BCC), said the figures showed manufacturers still faced a challenge to recover from the financial crash, despite what he called a respectable increase of 0.9% compared with the previous three months.

"Longer-term comparisons highlight the challenges facing manufacturing. Output is still some 10% below its pre-recession level, and export markets for UK manufacturers may be volatile in the months ahead. Nevertheless, many manufacturing firms have demonstrated resilience during the recession, and many have successfully moved into new markets.

Rob Wood, UK economist at Berenberg Bank, said it was clear from the manufacturing figures that the UK consumer was driving demand. Most of the rise in sales has been domestic, rather than through exports in recent months.

He said: "The trade figures were disappointing, with the trade deficit widening to its highest since October last year as exports fell sharply.

"The total deficit was £3.1bn, well above consensus expectations of £1.7bn. As with industrial production, the trade data are extremely volatile. A substantial part of the 16% fall in goods export volumes to the non-EU this month will almost certainly be reversed in August.

Meanwhile, figures from the Bank of England show that it appears to be winning consumers round to its view that inflation is falling and interest rates will stay low for at least three years, according to its survey.

A poll of consumers by GfK/NOP for the Bank found that consumers believed the current rate of inflation was lower than in the spring and was set to fall at a faster pace than they previously expected.

Consumers said inflation was 4% compared with their answer in May, which was 4.5%. While the new figure is still much higher than the official CPI measure of inflation, which last month was 2.8%, the fall will be welcomed inside Threadneedle Street.

Asked about their expectation of inflation in 12 months' time, respondents replied that it would be 3% compared with the 3.3% they said in May.

Attitudes to the future path of interest rates have also eased. Surveyed only days after governor Mark Carney issued "forward guidance" outlining how interest rates will stay low for the next three years, 29% of respondents expected a rise in interest rates over the next 12 months compared with 34% in May.

Carney wants consumers to base their spending decisions on his prediction that base rates will stay at 0.5% until 2016.

He said last month that the economy needed to generate an extra 750,000 jobs before a re-examination of the central bank's interest rate policy. He said a surge in new jobs to bring the unemployment rate down to 7% would be a strong indication of the economy's renewed health.

The Bank said: "The survey began in 1999 and there have only been three occasions when fewer respondents expected interest rates to rise – February and May 2001 and November 2008."

Powered by article was written by Phillip Inman, economics correspondent, for The Guardian on Friday 6th September 2013 19.57 Europe/London © Guardian News and Media Limited 2010


image: © Guillaume Paumier

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