The UK Economic Outlook

22nd December 2010

The Office for National Statistics says growth was a 0.1 per cent lower for the first three quarters of 2010 at + 2.7 per cent rather than the previous +2.8 per cent estimate.

Having crunched the real numbers, Schroders European economist Azad Zangana adopts a glass half full perspective saying it is "slower better growth".

The growth in government investing has been downgraded significantly, household consumption has nudged up, but, the firm says, the significant number is growth in investment which has been doubled to more than 6.1 per cent. Zangana is particularly impressed with business investment growth of 8.9 per cent year on year rather than the estimated 4.6 per cent.

He says: "The higher business investment is especially encouraging as it shows that despite the headwinds of lower domestic demand and tougher lending conditions, businesses are managing to raise capital and choosing to expand their capacity."

Schroders also sees a reduced reliance on government investment as positive particularly because  government spending is due to begin to fall in real terms from next year. It says the increase in household consumption is also helpful, particularly as the savings ratio increased from 3.5 per cent to 5 per cent from the second to third quarter which might have dampened down that spending.

Henderson Global Investors' chief economist Simon Ward is also encouraged by investment growth putting it down to a previous strong improvement in corporate liquidity. He also believes the increase in the savings ratio "implies that consumers have more in reserve as high inflation and tax hikes constrain real income expansion".

However Ward is discouraged by a revision downward in net exports. He says this will dash the Bank of England's Monetary Policy Committee's hopes that a necessary rebalancing of the UK's trade position may have begun.

Ward warns that the MPC needs to be focused on nominal domestic demand which rose by an annual 6.8 per cent, down from the estimated 7.1 per cent but still the fastest since 1999.

He believes the recovery in GDP is still slightly ahead of the early 1980s recovery which followed a recession on a comparable scale.

In its report on the figures, The Daily Telegraph quotes less upbeat economists.

Vicky Redwood of Capital Economics says: "The raft of UK data does little to improve the prospects for the economy next year. The upshot is that continued strong recovery seems far from assured." She expects growth of just 1.5 per cent. This contrasts with Schroders' more bullish prediction of 2.3 per cent.

On the Telegraph, Anthony Hollis is cynical about all the numbers.

He comments: "The difference in this report is one tenth of a percent which is totally irrelevant in the scheme of things. Knowing how the gathering of statistics works, and the ingredients within them, there is a much greater margin for error than one-tenth of a percent. By the way I am sure one tenth of a percent will look miniscule when the effects of a the current seize up of economic activity for December is taken into account."

Perhaps he means the effect of the snow.

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