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UK’s double-dip recession ends in ‘sensational style’

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The ONS’ preliminary estimate of Q3 GDP showed the economy grew by a huge 1.0%, ending the UK’s longest double-dip recession since the Second World War in sensational style, says Azad Zangana, European Economist at Schroders…

Year on year growth rose from -0.5% to flat. The results are significantly stronger than the 0.6% consensus estimates, and our own estimate of 0.5%.

Within the details, the service sector made the biggest positive contribution growing by 1.3% following a decrease of 0.1% in the previous quarter. The production sector also posted an impressive 1.1% gain, although the construction sector continues to be the laggard, declining by 2.5% in the latest quarter.

It is worth bearing in mind that there are some temporary factors that have artificially boosted the latest quarterly results that will drop out of the numbers. Firstly, the London 2012 Olympic Games will have provided a boost from ticket sales, extra tourism and additional investment coming to fruition. Secondly, the reversal of the extra bank holiday effect to celebrate Her Majesty’s Diamond Jubilee also fell in this quarter.

Whether the better than expected numbers continue into the fourth quarter is difficult to judge. More recently, business surveys like the survey of Manufacturers conducted by the Confederation for British Industry (CBI) showed weakening activity heading into the fourth quarter. In addition, rising domestic energy prices and food price inflation is likely to renew the squeeze on household incomes. This is likely to hurt retailers in the run up to the crucial festive shopping period.

Overall, when considering the positive contribution from the temporary factors included in the latest number, underlying growth in the economy appears to be running at about +0.3% for the third quarter. That is not strong enough to shield the UK from the external risks that partly contributed to the latest recession. In our view, the UK remains at high risk of a ‘triple-dip’ recession in 2013 as domestic austerity continues and external demand is hampered by the Eurozone sovereign debt crisis. In addition, there is great uncertainty about the implications of the US ‘fiscal cliff’ after the presidential elections in November. Nevertheless, today’s better than expected numbers are welcomed, and will lead us to revise up our forecast for growth for 2012 and 2013.”

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