British economy steams ahead but derailment looms

27th August 2010, Comments 0 comments

Britain's economy grew at its fastest pace for nine years in the second quarter as construction soared, official data showed Friday, but it faces a difficult future as spending cuts and tax hikes bite.

Gross domestic product (GDP) grew by 1.2 percent between April and June to record the fastest quarter-on-quarter growth since 2001, the Office for National Statistics (ONS) said in a statement.

The second quarter growth figure was meanwhile revised higher from an initial estimate of 1.1 percent, while analysts had expected no change.

Britain's recovering economy had grown by a far more modest 0.3 percent during the first quarter between January and March.

"Overall, on the face of it, the UK economy's performance in (the second quarter) was robust and notably outstripped the eurozone as a whole and the United States," said Charles Davis, economist at the Centre for Economics and Business Research.

"Looking into 2011, notable headwinds lie ahead as VAT (sales tax) rises and public spending cuts start to bite and concerns remain over the state of key export markets."

From January, VAT levied on the sale of goods and services rises to 20 percent from 17.5 percent, fuelling fears that British inflation will spike.

Meanwhile on Friday, the US government slashed second quarter growth in the world's largest economy to a pace of 1.6 percent -- sharply lower than an initial estimate of the 2.4 percent.

Following the data, US Federal Reserve chief Ben Bernanke said the central bank would take more aggressive steps to boost growth if the economic outlook "deteriorated significantly".

In Britain, the ONS said it had revised up second-quarter construction output to 8.5 percent -- the highest rate of growth for 28 years. The statistics office had originally put the gain at 6.6 percent.

The Treasury welcomed the overall GDP data but was cautious regarding the outlook given massive cuts in government spending which are expected to dampen the economy.

"While the government is cautiously optimistic about the path for the economy, the job is not yet done," a Treasury spokesman said.

Britain exited a record recession in the fourth quarter of 2009, a few months before a general election saw a Conservative-Liberal Democrat coalition defeat the ruling Labour party.

The new government has moved swiftly to cut billions of pounds (dollars) from public spending as it seeks to slash a huge pubic deficit.

"While the second estimate of UK GDP ... confirms that the economy expanded at a pretty robust pace in the second quarter, the figures cast doubt on the sustainability of the recovery," said Capital Economics analyst Samuel Tombs.

"Quarterly GDP growth was nudged up ... largely as a result of faster growth in the construction sector than originally assumed. However, the expenditure breakdown of GDP shows that the recovery is built on very fragile foundations.

"Household and government spending did both post solid rises of 0.7 percent and 0.3 percent quarter-on-quarter respectively, but both sectors are very unlikely to maintain such growth rates as the fiscal squeeze kicks in over the coming quarters," Tombs added.

The ONS also said that the economy grew 1.7 percent in the April-June period compared with the second quarter in 2009. This was revised higher from an initial estimate of 1.6 percent.

© 2010 AFP

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