Robust economy brings relief for coalition

Britain’s much better than expected third quarter GDP figures came at exactly the right time for the coalition government.

While the figures still showed a slowdown in the UK economy from the previous quarter, fears that the country is grinding to a halt look premature.

The UK grew by 0.8% in the three months to the end of September, according to preliminary estimates by the Office for National Statistics (ONS). Analysts had only forecast growth of 0.4%.

Year-on-year expansion came in at 2.8%, better than the 2.4% pencilled in by experts and ahead of the 1.7% reported in the period to June.

In August, the ONS revised second quarter growth up to 1.2% from 1.1% previously following a sharp hike in the construction output estimate.

Howard Archer, chief UK economist at IHS Global Insight, said he still thinks growth will slow to 0.4% in the fourth quarter and then to edge lower still in the first half of next year. But the third quarter spike means GDP growth is now likely to come in at 1.8% in 2010. “We see growth slowing to 1.6% in 2011,” Mr Archer said.

It may also mean a double dip recession scenario may prove unlikely now for the UK, though the level of uncertainty surrounding the future economic conditions of the nation remains high.

For the government, the data also gave some credibility to a severe austerity package unveiled the previous week.

On 20 October, the coalition government announced £81bn of spending cuts, fixing budgets for each government department until 2014-15, which will bring “sanity to the public finances”, according to chancellor George Osborne.

Average cuts of 19% were seen in departmental budgets to be implemented over the next four years.

Key measures of the review included: £7bn of cuts to the welfare budget, including housing and child benefit changes; 8% defence cuts, including 42,000 jobs losses in the MoD; a permanent bank levy to raise £2.5bn each year; and the raising of the retirement age.

The spending review is a result of the UK spending significantly more than it generates from taxation. Therefore borrowing has hit record levels with public sector net debt standing at £843bn (excluding financial interventions), equivalent to 57.2% of GDP at the end of September and compared with £688bn (49% of GDP) at the end of September 2009.

By fiscal year 2014-2015 (April-May), the government aims to have cut back the budget deficit, the gap between annual spending and borrowing, from 11% of GDP to 2%.

Some economists have argued that severe cutbacks and tax hikes will curb consumer spending and, while possibly achieving the government’s objective of reducing its expenditure and raising tax revenue, could slow – or even stop – economic growth, and the budget deficit could continue to rise.

It is early days to judge what impact on the economy the cutbacks will eventually have, but the UK may be in better shape to deal with it than many thought.