Worrying signs for UK economic recovery

Britain’s economy relied more heavily on spending by households for growth in the third quarter despite a fall in take-home incomes, underscoring the challenges of getting the recovery onto a sounder footing.

In another disappointing sign for policymakers, business investment was weaker than in an earlier reading of how Britain’s economy fared from July to September.

Official data also showed Britain’s current account deficit matched a record high in the third quarter, hurt in large part by lower returns on foreign investment, sending sterling lower.

Samuel Tombs, an economist with consultancy Capital Economics, said the numbers left Britain’s recovery looking even more unbalanced, but the economy was still likely to grow about 3% next year. “Despite this somewhat bleaker assessment of the UK’s recent economic performance, there remain plenty of reasons to be optimistic on the outlook for 2015,” he said, citing the fall in oil prices and more recent signs that pay growth is picking up.

Britain’s yearly growth rate in the third quarter was revised to 2.6% from a previous estimate of 3%, hurt by downward revisions to growth in each of the previous five quarters and by lower investment and higher imports.

Quarterly growth was confirmed at 0.7% between July and September, slowing slightly from the second quarter.

Britain struggled to grow in the years after the financial crisis and despite a strong recovery since early 2013, the economy is only 2.9% larger than its pre-crisis peak, the Office for National Statistics said, a worse performance than previously thought.

Pay growth has failed to rise much, spurring households to dip into their savings.

The ONS said household disposable income, after tax and inflation, fell 0.1% on the quarter and was up only 1% on the year.

Nevertheless, consumers dug into their savings and household spending picked up speed, rising 0.9% from the April-June period and making it the main driver of growth.

Weak earnings have also put living standards at the centre of campaigning for Britain’s national elections in May.

To the relief of Prime Minister David Cameron, earnings have recently shown some signs of picking up.

The ONS also said Britain’s current account deficit rose to £27bn (€34.3bn) in the third quarter, equivalent to 6% of GDP, matching the biggest deficit on record.

Meanwhile, the US economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear.

Other data yesterday showed consumer spending rose solidly in November, which could offset an unexpected weakness in durable goods orders.

The Commerce Department revised up its GDP growth estimate to a 5% annual pace, citing stronger consumer and business spending than it had previously assumed.

It was the fastest growth pace since the third quarter of 2003. The economy was previously reported to have expanded at a 3.9% rate.

* Reuters