UK: Robust Growth, Though Economic Imbalances Remain

The second estimate of Q3 GDP growth was unrevised at 0.8% (q-o-q), although the breakdown of the national accounts indicated that the current consumer-driven recovery risks losing momentum unless export growth gathers pace. An improving labour market helped household consumption surge to a four-year high of 0.8% (q-o-q) in Q3. Moreover, the slump in investment appears to have troughed as gross fixed capital formation accelerated to 1.4% (q-o-q), although this still represented a 1.6% decline in y-o-y terms. With consumer spending underpinning activity, the economy remains vulnerable to falling real wages. Wage growth eased to just 0.8% (y-o-y) in the three months through September while inflation remained stubbornly high at 2.8% over the same period. This has led some observers to question the sustainability of the recovery, particularly with weak growth in the Euro zone weighing on external demand. Exports, which account for approximately one-third of GDP, plunged by 2.4% (q-o-q) in Q3, meaning that net trade subtracted 0.9%-points from overall growth. Latest indicators, though, suggest that GDP growth could accelerate further in Q4, owing to continued strength in the dominant services sector and an upturn in manufacturing. A rush of new orders, together with increased job creation, helped the PMI for manufacturing beat expectations in November, climbing to 58.4 from 56.5 in October. On balance, our panel has raised its 2014 GDP forecast for a seventh straight month.

Chancellor George Osborne maintained that austerity measures are working in his Autumn Statement, with the OBR forecasting a small budget surplus by FY 2018/19, a year earlier than previously estimated.


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