The UK grew in Q3 - by 1%

The release of today’s GDP figures will basically allow everyone across the political spectrum to tell the story they wish to tell.

Growth is back.  After 3 quarters of contraction or, as we economists like to call it, ‘negative growth’ we are back on track to expand.  Well, yes and no.  A 1.0% bounce is great news, but not quite enough to completely wipe out the losses of the last year: in Q3 2011, the index of GDP stood at 103.1 and is now 103.  If I were an Olympian having struggled and pushed myself through 12 months of hard training and effort I’d be disappointed not to have improved my performance even if recent training has been ‘going really well’.

The story of the last 12 months is one of flat activity.  Hmmm.  Not so great then.

The winners in the economic race for a turnaround performance

have been in particular Agriculture, Forestry and Fishing (+2.2%), Manufacturing (+1.0%) and Mining and Quarrying (+2.3%) for they have all emerged out of recession this quarter having been in negative or zero territory for the previous four quarters.  Evenso, they are all still well below their levels as of a year ago:  with contractions over the period of -5.1%, -6.6% and -0.8% respectively.  So, they’re out of recession but still in a depressed level of activity.

Construction is the stand out under-performer.  With falls in the last four out of five quarters, the sector shrank by some 10.8% over the year.  They are still deeply at a depressed level of activity in recession.  Sorry if I am laying this on with a trowel.  The best that can be said is that the trajectory of contraction has slowed: from -5.9% in the first quarter of the year, to -3.0% in Q2 and most recently by -2.5%.  It got worse by less as it were in Q3.

I suspect that in October and November there will be some catch up in the sector because there was a stop put on any road or disruptive building and repairs work in London during and in the run up to the Olympics.  And if we have decent December weather, this sector might start to shown some further signs of improvement.

The prize for ‘most interesting performance’ must go to the Distribution, Hotel and Restaurant sector.  After a pretty dreary 12 months, the sector expanded by 1.6% in Q3 which not only lifted its activity by 1.1% over the year but also contributed some 0.2% to the overall 1.0% growth figures.  The largest part of this growth was in motor and general retailing.  I am also guessing that some of the hotels and restaurants performance will be a positive Olympic effect driven by an influx of visitors to the UK.  There are other factors, however, that might have influenced UK domestic spending in the sector such as the trend this year for ‘staycations’ and the unbelievably positive buzz that pervaded the Olympics.  We will wait to see whether that same buzz and ‘feelgood’ factor carries over into Q4 and the run up to Christmas. 

The prize for biggest contribution to growth is shared by not only, Distribution, Hotels and Restaurants but also ‘Business Services and Finance’ (up 1.0% in Q3) and Government and Other Services (which includes the spend on Olympics tickets and rose by 1.6%).  These three sectors together contributed 0.2%, 0.3% and 0.4% respectively to the overall growth figure of 1.0% in the quarter.    It reminds us of the importance of the financial sector and services sector in general to growth in the economy.  While it makes sense for the future to encourage the growth of manufacturing and the export of ‘goods’, we are also a big and important high value service provider to the world. 

The ‘2012 effect’ with unusual factors such as the number and timing of bank holidays and the Olympics will have distorted the timing of growth within the year and may have had a positive upward effect on overall growth.   Overall, once these effects are stripped out it looks like Q3 is a bit higher than it ‘should’ be and the previous two quarters under-reported real activity.  We can expect the next quarter to record a steady and modest performance in some sectors with others still in the recovery room receiving treatment. 

The question hanging in the air is where will the continued demand come from in the system to fuel and sustain growth where it has started to emerge.  If we need to pay attention to any sector in particular, it is construction where demand seems to be stagnant and showing little signs of recovery while it also provides a huge direct potential effect on growth and employment and a similarly huge multiplier effect on domestic activity in related sectors.

Both the Chancellor George Osborne and his shadow Ed Balls will be able to tell the story they want to tell: either that the economy grew out of recession in Q3 or that it is still flat-lining compared with a year ago.  Both are right.  But I think the view of Mervyn King, Governor of the Bank of England, is the most convincing: that we will continue to zig-zag along the path towards decent and sustainable growth for the near-term.