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Britain is 'booming' but rate rises are looming
The UK economy grew by 0.8% in the third quarter, bang in line with forecasts and raising the question of when the Bank of England will raise interest rates.
The economy grew by 0.8% in the third quarter, according to the latest data from the Office for National Statistics (ONS).
The expansion builds on the 0.7% growth recorded in the second quarter, and chimes with a host of other positive indicators.
For the past three months purchasing managers’ indices across the manufacturing, construction and services sectors have signalled an economy that is expanding, supported by independent surveys from the Confederation of British Industry and the British Retail Consortium.
‘Britain is booming again with the economy showing the most sustainable and robust-looking upturn since the financial crisis,’ said Chris Williamson, chief economist at Markit, the financial data provider.
‘The UK economy grew at a robust pace in the third quarter, expanding at the fastest rate since the second quarter of 2010,’ he said highlighting growth in all four sectors - manufacturing, services, agriculture and construction – for a second consecutive quarter.
'We now have further confirmation that the UK has shaken off the last vestiges of economic stagnation, placing [chancellor] George Osborne in a position of strength ahead of the Autumn Statement,' commented Nancy Curtin, chief investment officer at Close Brothers Asset Management.
'With a strong reading from Q3 GDP, we can look forward to further growth, leaving previous fears of a triple dip recession firmly in the shadows and undermining any further calls for more QE [quantitative easing or 'money printing']. The labour market is improving, and consumer confidence should continue to pick up.'
Curtin believed the UK stock market would continue to rally. 'We expect to see investors' faith in domestic stocks grow even stronger – particularly in mid-caps [medium-sized FTSE 250 stocks], which have been able to exploit the economic upswing this year,' she explained.
'If history has taught us anything it's not to be complacent and there could still be bumps along the road, but if the recent positive economic data can translate into a rosier outlook for earnings, it will act as a catalyst for further gains for investors into 2014.'
The strong showing from the UK, however, contrasts with the disappointing numbers emerging from France and Germany yesterday. There, manufacturing and services purchasing managers’ indices fell below expectations amid concerns that the appreciation of the euro is depressing profits.
The good news increases the pressure on Bank of England governor Mark Carney to update the market on when the monetary policy committee might raise interest rates. Carney’s policy of ‘forward guidance’ so far has indicated holding interest rates at 0.5% until 2016. However, announcing the policy in August he said the rate freeze would be dropped if inflation spiked or if unemployment fell significantly.
Although Azad Zangana, European economist at Schroders, expected the pace of growth to tail off the surge in the housing market should keep the economy steady next year and keep a rate rise on the agenda.
‘All eyes will not turn to the Bank of England which needs to provide an update on its forward guidance on interest rates. Due to the unemployment rate falling somewhat faster than expected, the Bank may bring forward its own forecast of when the Bank may start considering an increase in interest rates,’ said Zangana.
Williamson commented: ‘An imminent hike is certainly not on anyone’s radar, but if the economic data continue to surprise on the upside, it’s reasonable to assume that rates will start rising in 2015.’
Andrew Smith, chief economist at KPMG, the accountants, welcomed the figures but cautioned, ‘there remains a long way to go – five years on from the crash, output is still some 2.5% below its previous peak and unemployment remains elevated.’
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by Chris Marshall on Dec 11, 2013 at 09:00