UK economy growing faster than expected, but deficit high

The UK economy is growing faster than expected, in spite of fears that underlying weaknesses still linger.

According to the Office for National Statistics, UK GDP grew by 0.8% during Q3 2013.

Annual GDP growth was revised upward to 1.9% in Q3 2013 (three months up to the end of September), compared to 2012.

The original estimate had been 1.5%.

Q3 2013’s 0.8% increase over Q3 2012 marks the largest GDP increase for over three years. This positive revision follows another report showing a larger-than-expected decline in the unemployment rate.

UK economy growing faster, but so is deficit

The Office for National Statistics also reported that November’s public sector net borrowing requirement was £16.5bn, compared to £15.6bn in November 2012. The figure excludes taxpayer’s money that was used to bail out banks. November’s public sector borrowing requirement was a nearly 25-year record.

The deficit now stands at 5.1% of GDP, its highest level since the Lawson boom more than twenty years ago.

Sky News quotes Howard Archer, chief European and UK economist at IHS Global Insight, who said “Markedly rising employment and a robust housing market will likely underpin consumer spending over the coming months. If the recovery is to be sustained at a healthy pace, it really does need a marked, extended pick up in business investment and for exports to improve markedly.”

The Telegraph quotes David Kern, chief economist at the British Chambers of Commerce, who said “A fall in the investment balance and a wider trade deficit should not be taken lightly. While it is good news that we are recovering … the large current account deficit highlights the importance of prioritizing measures to boost exports.”

Consumer spending has increased because Britons are spending part of their savings. In Q3 2013 the household-savings-ratio dropped to 5.4% from 6.2% in Q2 2013.

Although the British economy has grown 0.5 of a point better than the Office for National Statistics’ previous estimate, it is still 2% smaller that it was before the financial crisis of 2008.

Graeme Leach, Chief Economist at the Institute of Directors, said:

“As the Chancellor looks at the latest GDP figures he’s likely to reach for a glass of wine and indigestion tablets at the same time. The strength of GDP, with faster year-on-year growth, will be a cause for celebration. But the sources of that growth will make him uncomfortable.”

“Three key problems stand out. Firstly, there is a strong contribution from volatile stock-building. Secondly, the fall in the savings ratio from 6.2% to 5.4% shows spending is running ahead of incomes. Finally, the current account deficit widened from £6.2 billion to £20.7 billion between Q2 and Q3, the highest share of GDP since 1989.”