U.K. GDP Data Beat Expectations

By LAURENCE NORMAN

LONDON—The U.K. economy grew strongly again in the third quarter, the Office for National Statistics reported Tuesday, defying expectations for a sharp slowdown in the country's economic recovery.

In a double-dose of good news for Prime Minister David Cameron's government, soon after the data was released, Standard & Poor's rating agency revised the outlook on the U.K.'s triple-A rating to stable from negative.

In its preliminary estimate, which is frequently revised at a later date, the ONS said the economy grew 0.8% between July and September after an unusually strong 1.2% quarterly expansion between April and June.

The economy expanded 2.8% in the third quarter from a year earlier, after growing 1.7% on a year-to-year basis in the second quarter, the ONS said. That's the strongest annual growth rate since the third quarter of 2007.

Economists surveyed by Dow Jones Newswires had suggested the economy would grow 0.4% quarter-to-quarter and 2.4% year-to-year.

U.K. assets moved higher after the data and spiked again after the S&P news. The pound was recently trading at $1.5880, up almost a cent against the dollar. The euro also fell against the pound. Stocks rose modestly while gilt prices fell sharply, with December gilt futures down 1.01 at 123.80.

The growth was broad based with the service sector, construction, government and the industrial sectors expanding robustly. The ONS said that were it not for the bad weather in the first quarter, underlying growth has been broadly similar in each of the first three quarters of 2010.

The numbers will provide a significant boost for the government as they try to convince the public their austerity measures, which include £81 billion ($127.44 billion) in spending cuts and tax hikes, are well-timed and fair.

Chancellor of the Exchequer George Osborne said the strong preliminary growth figures were "very welcome." Along with the decisive action we are taking on the deficit it should help underpin confidence," he said, noting that "the lion's share" of growth is coming from the private sector. Mr. Osborne said the fact that underlying growth was similar throughout this year gives him confidence that "although global economic conditions remain choppy, a steady recovery is underway."

Meanwhile, in announcing its revised outlook on the U.K.'s triple-A rating, S&P said coalition government's "policy objective to close the fiscal gap further underpins the ratings."

"We believe that the completion of the government's Spending Review...reduces uncertainties about its political resolve to tackle the challenges resulting from the structural deterioration in public finances between 2007 and 2009," S&P said. S&P had put the U.K. on negative outlook in May 2009.

The government has seen consumer and business confidence fall back in recent months, while bank lending remains tight and house prices fall. The opposition Labour Party has long argued that the government's measures could choke off an economic recovery.

Half the contribution to quarterly growth came from the services sector, which expanded 0.6% on a quarter-to-quarter basis , compared to 0.9% in the second quarter. Total production expanded 0.6% quarter-to-quarter after a 1% quarterly rise between April and June. Manufacturing output expanded 1%.

The ONS said that construction expanded 4% after a 9.5% increase in the second quarter. The government sector grew 0.6%.

The independent Office for Budget Responsibility has predicted the economy would grow 1.2% in 2010 and 2.3% in 2011.

ONS data showed the economy had still only made up less than half the output lost during the 2008-09 recession.

Some economists said the growth data reduces the chances that the Bank of England's Monetary Policy Committee will look to expand its £200 billion bond-buying program to aid growth.

"With inflation above target and growth above trend an extension of Quantitative Easing would be difficult to motivate. We therefore think the committee will resist loosening policy when it meets next week," said Simon Hayes, U.K. economist at Barclays Capital.

Last week, the minutes of the MPC's latest meeting showed a three-way split, with seven members voting to keep policy on hold, one member supporting a rate hike and another calling for additional quantitative easing.

BOE Governor Mervyn King has backed the government's fiscal plans and signaled the MPC would step in to boost the economy if growth flagged under the weight of spending cuts and tax hikes.

On Monday, in a bid to move the focus away from spending cuts, Cameron outlined a series of initiatives aimed to spur growth, including investment in innovation hubs and low carbon energy projects and a promise of measures to increase competition in key sectors of the economy. (FONTE: Wall Street Journal)