Sun in London? In October? Yes…at least economically speaking.
It may not be a bright, sunny day for the UK economy, but with Thursday’s news of a surge in economic growth in Q3, perhaps we can be forgiven for feeling that at least the clouds have parted. And believe me, Londoners will take “partly cloudy” when we can get it.
This uptick in GDP growth marks Britain’s emergence from a double-dip recession, and I have to say it feels like there is a real shift in policy focus off the back of that one number. The preliminary estimate from the Office for National Statistics put GDP growth at 1.0% for the third quarter of 2012. It was well above consensus estimates in the range of 0.6% to 0.8%.
This marks the first quarter of expansion since the third quarter of 2011, and it’s the fastest rate of growth in five years. What’s behind the surprise increase? Probably the Olympics. The services sector was up 1.3% for the quarter, and it makes up about 75% of overall GDP. So all those tourists and sport fanatics helped out. In fact, some estimates tag about 0.2% of the GDP increase to Olympic ticket sales.
No doubt this number will be used to justify Prime Minister David Cameron’s government’s stance on fiscal policy. Their determination to meet the self-imposed fiscal targets had been blamed for the abrupt halt in the UK’s economic recovery. Had Q3 growth numbers disappointed once again, the fiscal authorities would have faced a tough choice: either slow the pace of fiscal adjustment to boost the growth outlook or introduce additional austerity measures to meet the debt target. Thankfully for the government, this is now a decision for another day. As Cameron said, “There are always one-off figures in all of these announcements, but they do show an underlying picture of good and positive growth. We’ve got to stick with the program.”
For the Bank of England’s Monetary Policy Committee, the number will also come as a relief. If you’ll remember, back at their October 4th meeting, where the Monetary Policy Committee held their benchmark rate steady at 0.5%, while also keeping its bond-purchase plan unchanged at £375 billion, a few members voiced their concerns about the effectiveness of quantitative easing. Strong GDP growth suggests QE may well be effective.
The question now becomes “how good is this news?” In a couple of weeks, the Monetary Policy Committee will meet again to decide where to go with its bond-purchase program. The news may be good enough that they will only increase the program’s size by £25 billion. It may even be good enough that they won’t have cause to increase the program’s size at all. I am more cautious – Aristotle’s phrase “one swallow does not a summer make” springs to mind. So, for the meantime, the forecast is probably for “partly cloudy, with chances for sun.”
I you’re interested, I’ve got more detail in my Central Bank Watch. You can find it here.