Strong UK growth keeps QE at bay – 2087
- 26 October 2010
Azad Zangana, European economist at Schroders says the GDP data means that the UK economy is now a year into the recovery and has grown by just under 2.8% since the end of the recession. Even using pre-crisis measures of trend growth, GDP running at 0.8% a quarter means it is above trend, he adds. The official GDP release can be viewed here.
The performance helps to further support Schroders view that the private sector will be able to more than make up for job losses in the public sector resulting from government cuts. Zangana says the economy has already generated 343,000 new private sector jobs in the first half of this year, and going by the growth numbers published today, it appears that this trend will continue.
No justifcation for QE2
He adds: "With inflation still running above the Bank of England's 3% upper limit, the stronger than expected growth outturn means that it will be incredibly difficult for the Monetary Policy Committee to justify resuming Quantitative Easing at their November meeting."
In a recent interview recently by Mindful Money Zangana forcefully argued against the need for more stimulus in the UK.
Drilling down into the details, Zangana notes that all of the major sectors of the economy enjoyed positive growth over the quarter with the exception of the agricultural sector. Production industries grew by 0.6%, and within this, the manufacturing sector expanded by 1% over the quarter. Growth in the construction fell from the exceptional 9.5% in the second quarter to a more modest 4% in the last three months. Finally, the service sector enjoyed another strong quarter growing by 0.6%.
Easing government jitters
The figures today should help ease jitters in the Coalition government over growth against a backdrop of heavy spending cuts. As the Daily Telegraph points out, a stronger recovery in the private sector should give Britain a better chance of withstanding austerity measures.
Zangana's analysis was echoed by Simon Ward, economist at Henderson: "GDP growth of 0.8% in the third quarter should scotch any discussion of "QE2" at next week's MPC meeting."
Ward says that UK GDP has now recovered 40% of its loss between the first quarter of 2008 and the third quarter of 2009. Even assuming that growth slows to 0.4% in the fourth quarter, he forecasts GDP will increase by 1.8% in 2010 versus a consensus forecast of 1.3% at the start of the year.
Growth faster than in early 80s
Amazingly, Wards reveals that relative to the previous peak, GDP is higher than at the equivalent stage of the early 1980s recession / recovery.
While some sceptics might point to the significant, and unsustainable, contribution to recent growth from construction and government services, Ward point out that even after excluding these sectors, output still grew by 2.6% in the year to the third quarter.
Ward also believes it is wrong to assume that coming public spending cuts imply a decline in government services output. To the extent that cuts fall on transfer payments and public sector wages, there is no impact. Government services output rose by 8.8% over 1992-97 despite a 5.5 percentage point fall in the public spending share of GDP between 1992-93 and 1997-98.
By way of comparison, Ward notes that third-quarter GDP was 3.9% below its peak level in the first quarter of 2008, compared with a maximum decline of 6.5% in the third quarter of last year. At the equivalent stage in the early 1980s (i.e. in the fourth quarter of 1981, 10 quarters after the peak in the second quarter of 1979), GDP was 4.4% lower (see chart below).
Ward's full analysis and further economic commentary from him can be viewed here . There is also a video of Ward discussing the encouraging growth figures and why the UK may not need any more quantitative easing here.
Last week, as reported by Mindful Money, Ward accused Bank of England governor Mervyn King of "misreading monetary developments" and warned further quantitative easing in the UK will lead to above-target inflation becoming entrenched rather than stimulate faster growth.
In a roundup of other economists views on today's data by Wall Street Journal, Howard Archer of IHS Global Insight notes that while the data suggests that the economy had more momentum than thought in the third quarter, it does not fundamentally change his view that growth will be markedly slower going forward as economic activity is pressurized by major fiscal tightening increasingly kicking in, persistently tight credit conditions, slower global growth and significant constraints on consumers.
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