British economy shows growth spurt, but inflation threatens

1st November 2011, Comments 0 comments

Britain's economy grew faster than expected in the third quarter, official data showed on Tuesday, but faces coming unstuck owing to high inflation, government cutbacks and the eurozone debt crisis.

British gross domestic product expanded by 0.5 percent between June and September, accelerating from 0.1-percent growth in the second quarter of 2011, the Office for National Statistics (ONS) said in a statement.

GDP also grew by 0.5 percent in the third quarter compared with the equivalent period in 2010, the ONS added.

Britain's recovery was aided by stronger output for the manufacturing and service industries, which helped to offset contraction in the construction sector.

"Gross domestic product rose by 0.5 percent in the third quarter of 2011, driven by strength in the services sector in particular and the production sector. The construction sector showed a small decline," the ONS said.

Despite the better-than-expected headline GDP data, analysts said the outlook for Britain's economy remained bleak.

The figures "do not alter our view that the economy is likely to fall back into recession over the coming quarters," said Capital Economics analyst Jonathan Loynes.

"There is a good chance that the economy will contract in the fourth quarter. And against a background of high inflation, the ongoing fiscal squeeze and the escalating eurozone crisis, we still see the economy stagnating in 2012 -- or worse," added Loynes, the consultancy's chief European economist.

The economy had slowed to a virtual halt in the second quarter as the country's output was hit by a series of one-off events.

Most workers in Britain did not work on April 29, the day of Prince William's marriage to Catherine Middleton. British manufacturing also suffered from a shortage of parts from earthquake-hit Japan.

"While the third quarter growth rate looks respectable it is important to remember that this follows a second quarter figure depressed by having fewer working days because of the royal wedding and supply disruptions caused by the Japan earthquake," said James Knightley, an economist at ING Bank.

"Consequently, we should have seen a big rebound in any case. So, for the economy to have only grown 0.5 percent in the third quarter suggests the underlying picture remains weak."

Against such a backdrop, the Bank of England last month decided to inject more new money into Britain's economy. The BoE is raising its Quantitative Easing by £75 billion (86 billion euros, $115 billion) over four months.

Under QE, the bank creates new cash which is used to purchase assets such as government and corporate bonds to encourage lending and boost growth. The BoE injected £200 billion into the economy between March 2009 and January 2010.

© 2011 AFP

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