The UK economy recorded its strongest quarter-on-quarter growth since Q3 2007 - the quarter in which the Northern Rock bank run occurred.
The Office for National Statistics notes that the quarter was boosted by the comparison with Q2 in which a working day was lost due to the extra bank holiday, as well as the Olympic effect. While the ONS states that it is difficult to quantify the overall effect of the Olympics, it is clear that certain factors have played a non-trivial role in boosting the level of estimated output; allocating ticket sales to Q3 2012 contributed 0.2 percentage points to the quarterly rise in GDP.
The service sector surged in Q3 with 1.3% quarter-on-quarter growth while the manufacturing sector made up for the 0.8% decline in Q2 with a 1.0% bounce back. The distribution, hotels and restaurants sector was well boosted by the Olympics and recorded 1.6% quarter-on-quarter growth. This is very unlikely to be repeated in Q4, so one has to distinguish between temporary and underlying trends in the UK economy.
Indeed, there are reasons to be cautious - the construction sector appears to still be in free-fall, with a further 2.5% quarterly decline in activity in Q3 bringing the sector's decline over the last year to 10.8%. In addition, of the 1.0% rise in the whole economy, growth in the Government and other services sector contributed 0.4 percentage points to the rise and the sector's output stands 2.5% higher than a year earlier. With the bulk of public spending cuts yet to come, this cannot be sustained.
The return to growth is welcome news for the UK economy but unfortunately does not change the big picture that the recovery has been exceptionally weak. Although we know the figures are liable to change, it is clear that over the last year the economy has been broadly flat. Given the temporary factors driving this strong number; the slowdown in global economic growth and continued economic headwinds emanating from the Eurozone, the UK economy is unlikely to build up a head of steam. We think the economy would struggle to record growth in Q4 and is likely to contract by 0.1% across 2012. Sir Mervyn King this week suggested the Bank of England would have to think long and hard before undertaking further quantitative easing. In the short term the GDP data undermine the case for more QE, but we think the fundamentals are such that further monetary stimulus should not be ruled out by the end of 2012.
UK gross domestic product, real quarter-on-quarter percentage change
image: © urbanora