UK economy bigger and growing faster than thought, says ONS

Interest rate debate reignites after new European standard of GDP measurement revises up growth to 0.9%

Britain’s economy was bigger and grew faster than previously thought over the second quarter, according to official figures that measure GDP in a new way.

The economy also recovered sooner than previously thought from the recession.

The Office for National Statistics (ONS) said the economy expanded 0.9% over April to June as both the dominant services sector and construction enjoyed strong growth. That beat economists’ forecasts for GDP growth to hold at a previous estimate of 0.8%. But at the same time the ONS revised down the first quarter figure to 0.7% from 0.8%, leaving the estimate of year-on-year growth at 3.2%.

The size of the economy was also upgraded as the ONS moved to a new European-wide way of measuring GDP and incorporated other changes. Under the new method, illegal activities such as drug dealing and prostitution are included and other activities are accounted for differently, including research & development and military spending.

Explaining the figures, the ONS said: “The new data are based on the most far-reaching set of improvements to the national accounts in the last 15 years or so.”

The ONS left full-year GDP growth in 2013 unrevised at 1.7%. But it said the changes meant that UK GDP recouped lost ground from the downturn sooner than previously thought.

“The new data show that during the recent downturn the economy shrank by 6.0%, rather than the 7.2% previously estimated. GDP was also estimated to have exceeded its pre-financial crisis levels in Q3 2013, three quarters sooner than previously estimated. However, overall, the average absolute quarter-on-quarter revision between 1997 and 2014 Q2 was 0.16 percentage points,” statisticians wrote alongside the data.

Economists said the new estimates suggested there was less slack in the economy than previously thought and that could have implications for how soon the Bank of England starts to raise interest rates as it seeks to contain price pressures.

James Knightley, economist at ING Financial Markets said: “The substantial revisions due to new methodology mean that the UK economy is now 2.7% larger than it was before the global financial crisis started. Under the old methodology the data had shown that the UK was only 0.2% larger, which implies that there is now less spare capacity in the UK economy than previously thought.

“Taken on its own this could suggest that the UK may need to raise rates earlier and more aggressively than previously expected, but in the absence of inflation and wage pressures and with signs that the housing market is cooling we doubt that the Bank of England will move imminently. We still favour a February hike.”

Samuel Tombs, senior UK economist at Capital Economics, said the UK’s performance was still “very weak by historical and international standards”.

“It remains the case that it took longer than after any of the recessions in the 20th century for output to return to its peak,” he said.

For the second quarter, the ONS said growth was “broad-based” in output terms with production, construction and services all expanding from the first quarter. Agriculture, forestry and fishing contracted slightly quarter on quarter.

Growth in the service sector, which ranges from hotels to banking, was revised up to 1.1% from 1.0% and was the strongest growth for two and a half years. Against the backdrop of a buoyant housing market, the construction sector grew 0.7% rather than not at all, as previously estimated. But at less than 7% of the economy it has little impact on overall GDP.

In news likely to be welcomed by the government as it tries to move to an economy less reliant on consumer spending, the ONS said business investment growth accelerated in the second quarter. It increased by 3.3% on the quarter, compared with 0.9% growth in the first quarter. Household spending rose 0.6%, compared with 0.7% in the first quarter. The savings ratio, an estimate of how much households have available to save as a percentage of their total disposable income, rose to 6.7% but the general trend has been downwards over recent years as workers’ wages fall in real terms.

Less encouragingly for the government, exports fell 0.4% from the first quarter and were down 5.2% year-on-year.

Howard Archer, economist at IHS Global Insight, saw little improvement on the horizon for trade.

“Net trade will likely find it difficult to make any significant positive contribution to UK growth in the near term at least. The combination of weak eurozone economic activity and a strong pound is hampering the prospects for UK exports to develop decent growth and help overall economic expansion to become more balanced,” he said.

Overall, he forecasts growth will have slowed in the third quarter of July to September.

“The latest economic news remains largely strong, although it has been a little more mixed recently. It looks likely that consumer spending growth slowed to some extent in the third quarter, while the manufacturing sector clearly lost momentum,” Archer added.

Culled from: http://www.theguardian.com