S&P lifts downgrade threat as British economy grows

BRITAIN’S economy grew twice as fast as expected in the third quarter and ratings agency Standard and Poor’s lifted the threat of a credit downgrade, a boost for a government under fire over steep spending cuts.

But the risk of a sharp slowdown in the first half of 2011 remains, with strong headwinds likely to come from tax rises, a patchy recovery in Britain’s main trading partners and cuts which may cost half a million jobs in the public sector.

The Office for National Statistics said Britain’s economy grew 0.8% between July and September, down from a nine-year high of 1.2% in the second quarter, but twice the 0.4% most economists had expected. Sterling jumped and gilts hit a one-month low as investors reckoned the combination of above-trend growth and above-target inflation meant the Bank of England would struggle to justify an expansion of its “quantitative easing” to support the economy.

Speculation Britain’s central bank might pump more money into the economy gathered pace this month after one policymaker, Adam Posen, broke ranks to vote for additional easing. However, Andrew Sentance, the committee’s most hawkish member, lost no time in reiterating his belief that interest rates should now start to rise — albeit gradually. Economists said the data was likely to make the BoE keep policy unchanged for longer.

In annual terms, Britain’s economy grew by 2.8% in the third quarter, the fastest rate in three years and up from 1.7% in the previous quarter. The BoE had forecast growth of around 2.4% in August. Less than two hours after the data, ratings agency S&P raised the outlook on Britain’s triple-A rating to “stable”.