UK economic growth surprises

GDP data comes in ahead of expectations - what does it mean?

The big economic news item last week was the release of the third quarter GDP figures for the UK.  The consensus amongst forecasters was that the growth rate would slow from +1.2% in Q2 to +0.4%.  The growth rate did slow, but came in ahead of expectations, at +0.8%.  That means GDP has grown +2.;8% in 12 months.

The news was warmly received by the Tory/Liberal government.  It appeared to justify Coalition economic policies.  However, a closer look and a moment's thought reveals a different picture.

A key surprise was the continued growth in construction (+0.4%) in the quarter, when it had been expected to go backwards following a strong rebound in Q2.  Manufacturing grew as did services and government.  The Office for National Statistics indicated the underlying growth rate was the same in both quarters.  It is not yet clear why construction continued to grow - it could be due to ongoing government spending.

And here is the point we must get clear.  Growth this year is largely due to Labour's economic plans, not George Osborne's.  Osborne planned only an £8bn cut in the deficit this tax year compared to Labour and a chunk of that comes in a VAT increase from January.  A figure of £8bn is large, but in the context of government finances, it is not that significant.  This year's deficit had already been revised down from around £177bn to £154bn before the June budget - Labour's stimulus measures meant higher growth and higher tax revenue than had been expected.  Labour's policy continues to set the context for economic performance.

The Coalition will claim that its announcements on budget policy and the expectation of spending cuts will have contributed to economic confidence.  This is not clear however.  Recent surveys of consumer and business confidence have not been encouraging, suggesting that austerity talk could undermine the long term confidence in the British economy.  Moreover, while government bond yields are low (cost of government borrowing is low) these are at comparable levels to those seen under Labour towards the end of its last term.

All this combines to a difficult message for Labour to get across.  But we need to make the case because the Coalition's assertions and flimsy policies will not hold sway in media and public attention forever.

Tribune has just published my latest article on Labour economic policy.

Stephen Beer, 31/10/2010

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