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Olympics help UK economy leap recession hurdle by 1%

by Dylan Lobo on Oct 25, 2012 at 09:33

Olympics help UK economy leap recession hurdle by 1%

The UK economy grew by 1% in the third quarter, according to the Office of National Statistics (ONS).

This represents a much stronger performance than the 0.6% growth predicted and the first time the UK economy has expanded for three quarters and reduces the contraction for this year to 0.8%. The reading should discourage the bank of England to pump more money into the economy through quantitative easing at next month's monetary policy committee meeting.  

However, analysts believe the rebound was flattered by the boost from the Olympic Games and the lift from the lost working day due to the Queen’s Diamond Jubilee in June. C

Capital Economics analyst Vicky Redwood believes the reversal of the jubilee effect added around 0.5% to growth, while Olympic ticket sales added 0.2%, while the wider Olympic tickets boost is difficult to quantify.

Manufacturing data released at the start of October underlined the severe problems that have remaining in the UK economy, backing analysts' fears. The Market PMI September survey came in at 48.4, falling further beneath the crucial 50 level.  

Commenting on the GDP data, Royal London Asset Management economist Ian Kernohan said: 'As expected, GDP growth moved back into positive territory in the third quarter, although the number was much stronger than expected. No doubt this bounce will passed off mainly as an Olympic boost, though a much larger influence is the volatility caused by the Diamond Jubilee holiday in June.' 

Meanwhile Redwood would not be surprised if we see a return to contraction in the final quarter of the year.

'There are still a number of constraints on the recovery,' Redwood said. 'And as the Olympic effects unwind, it is still possible that the economy contracts again in Q4. Indeed, the business surveys have been painting a slightly gloomier picture, suggesting that underlying output is still stagnating or even falling slightly.'

Schroders European economist Azad Zangana was equally pessimistic.  

'Whether the better than expected numbers continue into the fourth quarter is difficult to judge. More recently, business surveys like the survey of manufacturers conducted by the Confederation for British Industry showed weakening activity heading into the fourth quarter,' Zangana said.  

'In addition, rising domestic energy prices and food price inflation is likely to renew the squeeze on household incomes. This is likely to hurt retailers in the run up to the crucial festive shopping period.'

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