The UK economy has slowed after poor overseas trade figures put a record drag on growth, leaving household spending to drive the recovery and casting further doubt on George Osborne’s hopes that strong tax receipts will help him hit ambitious budget targets.
Official figures confirming that GDP growth slipped in the third quarter came alongside a warning from a leading credit rating agency that the chancellor’s latest package of tax and spending measures left him at risk of missing his goal to run a surplus on the public finances by the end of the decade. Fitch Ratings said the chancellor was heavily reliant on economic growth holding up to balance the books.
But rival ratings agency Moody’s said the move to a slower pace of deficit reduction helped make the government’s fiscal plans “more realistic and deliverable”. At the same time, however, Moody’s remained sceptical that the chancellor would actually achieve a budget surplus by the end of the decade.
“We continue to expect a small deficit by the end of the current parliament,” it said in an update to financial markets.
There was also bad news for the chancellor in the detail of the latest GDP figures which showed growth of 0.5% in the third quarter of the year, down from 0.7% in the second quarter. A breakdown of the figures showed net trade, the gap between exports and imports, took a record 1.5 percentage points off quarterly growth.
GDP growth slows
The figures were at odds with the government’s pledge to rebalance the UK economy towards exports and away from reliance on consumer spending. However, in the latest quarter the weaker trade picture was a result of a jump in imports rather than weakness in exports, economists noted.
Imports rose at the fastest pace in almost a decade, up 5.5% on the quarter, while exports grew a smaller 0.9%.
- “The principal story here is one of a two speed economy, with domestic drivers performing well but with overseas demand weak,” said Philip Shaw, economist at Investec.
- “Taken over the past year as a whole, net trade has subtracted 0.4% from growth, while consumer spending has added 1.9%, indicative of a growing divergence between the internally and externally facing sectors of the economy.”
The GDP figures also showed manufacturing output fell 0.4% in the latest quarter, confirming that the factory sector is in recession after three consecutive quarters of contraction. That follows warnings from UK manufacturers that demand from abroad has waned as the global economy slows, led by China and other emerging market countries.
The construction sector, where growth tends to be volatile from quarter to quarter, contracted 2.2% in the third quarter, the ONS said.
It was left to consumer spending to be the main driver of GDP growth over the July to September quarter. Household spending was up 0.8%, its ninth consecutive quarter of growth.
“In terms of the breakdown, consumer spending did most of the heavy lifting ... Business investment was also punchy,” said Alan Clarke, economist at Scotiabank.
“At the other extreme, net exports were a big drag.”
Net trade drag
At his autumn statement and spending review this week, Osborne said a projected £27bn improvement in the public finances compared with his last budget in July, meant he had been able to soften a planned spending squeeze and lift the threat of tax credit cuts.
But leading thinktanks have been quick to cast doubt on the chancellor’s plans . The Institute for Fiscal Studies called Osborne’s 2020 target to run a surplus on the public finances “completely inflexible” and warned there was a 50-50 chance he would have to revisit his plans.
Fitch similarly warned the chancellor had “limited fiscal space if growth or revenues underperform”.
“Debt reduction is increasingly being driven by underlying growth and revenue trends, which could reverse,” it said in a statement.
“Using better-than-expected revenue forecasts to scale back previously announced expenditure cuts suggests that this may pose downside risks to fiscal targets,” it added.
“Fitch maintains its view that the nominal deficit target implies limited fiscal flexibility to respond to modest adverse economic shocks.”
Despite the latest slowdown in quarterly growth, economists forecast a solid pace of GDP expansion for the year as a whole. The ONS data showed GDP was up 2.3% in the third quarter on a year earlier. Last year, the UK economy grew 2.9%, beating other major industrialised nations.
John Hawksworth, PwC’s chief economist, said he still expected the UK to remain one of the fastest-growing economies in the G7 group of nations with GDP up 2.4% in both 2015 and 2016.
“Today’s figures show no change in the big picture of a steady UK economic recovery led by a broad-based expansion in private sector services, but held back by weakness in both manufacturing and construction in the third quarter,” he said.
The Treasury’s independent forecaster, the Office for Budget Responsibility, is estimating that GDP will grow 2.4% both this year and next.
This article was written by Katie Allen, for theguardian.com on Friday 27th November 2015 17.53 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010