UK economy grows at fastest rate in six years in 2013

Britain's economy in 2013 recorded its fastest annual growth since the financial crisis despite a slight slowdown in the last three months of the year, official data showed on Tuesday.

Supporting expectations for a bright 2014, Britain's gross domestic product rose by 0.7 percent in the fourth quarter, the Office for National Statistics said - in line with economists' forecasts for a small reduction from the third quarter's pace.

This rapid rate of growth - which is above Britain's long-run trend - is likely to increase speculation about when the Bank of England will raise record-low interest rates.

BoE Governor Mark Carney has said there is no need for rates to rise anytime soon, as Britain's total output is still well below pre-crisis levels. But unemployment has fallen far faster than the bank forecast in August, raising questions about what long-term inflation pressures might be building in the economy.

Tuesday's quarterly GDP figure took Britain's full-year growth for 2013 up to 1.9 percent from just 0.3 percent the year before. This is the highest since 2007, although total output is still 1.3 percent below the pre-financial crisis peak reached in the first three months of 2008 - a weaker situation than in almost all other big advanced economies.

A long list of economic indicators over the last few months have suggested Britain's economy is recovering faster than either policymakers or independent forecasters predicted.

Data from the Confederation of British Industry released earlier on Tuesday suggest 2013's strong growth had continued into January.

Figures last week showed British unemployment plunged to within a whisker of the Bank of England's level for considering an increase in interest rates, but the central bank stressed it would be in no rush to act.

Tuesday's figures will also be a boon for Britain's coalition government.

With growing evidence the recovery is gaining strength, opinion polls for the 2015 election suggest the Conservative-led government still lags behind the Labour opposition, which says Britons have been hurt by the rising cost of living.

Output in Britain's service sector - which makes up more than three quarters of GDP - rose by 0.8 percent in the fourth quarter, maintaining its pace from the previous months, which was the fastest in a year.

But industrial output growth slowed to 0.7 percent from 0.8 percent, as the strongest manufacturing growth since the third quarter of 2010 proved insufficient to offset falling North Sea oil and gas output.

Construction - which accounts for less than 8 percent of GDP - fell by 0.3 percent, reflecting a weak November.

A survey on Monday showed British households have a growing sense of job security and declining fears that inflation is driving prices higher.

So far, the recovery has been fuelled by consumer spending and an upturn in the housing market, although BoE policymakers over the last week have said they expect business investment to begin making a contribution later in the year.

Critics of the government's economic policies say its attempts to revive the housing market will not help bring about the long-hoped for rebalancing of Britain's economy towards more manufacturing and exports.

The ONS's preliminary estimates of GDP are among the first in the European Union, and are based partly on estimated data. On average, they are revised by 0.1-0.2 percentage points up or down by the time a third estimate is published two months later.

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Bank of England holds interest rates and quantitative easing

Governor Mark Carney believes much of the current 2.7% inflation rate can be blamed on one-off shocks

The Bank of England has rejected calls for a rise in interest rates despite a strong run of surveys showing the economy is recovering at its fastest pace since 2010.

In a widely expected decision, the central bank's interest rate setters kept the base rate at 0.5% and the level of its monetary stimulus to the economy, known as quantitative easing, at £375bn.

Some analysts have called for a rise in interest rates in response to the improving economic picture and a recent jump in housing market activity.

However, the bank's monetary policy committee has agreed to maintain its current policy stance until the unemployment rate falls to 7%. It expects to reach this milestone in 2016 after 750,000 jobs have been created.

Governor Mark Carney believes the economy remains weak and much of the current 2.7% inflation rate can be blamed on one-off shocks.

The bank is known to be extremely concerned at the level of business investment, which has continued to fall this year despite the pace of recovery picking up since the spring and many commentators describing it as a well-advanced and sustainable expansion of economic activity. Without a return to healthy rates of business investment, senior Bank staff fear the economy will be forced to rely on consumer spending to maintain growth.

Philip Shaw, UK economist at Investec, said the positive momentum of the economy made more QE unlikely.

"The key question surrounds the possible timing of the first interest rate hike. This is some way off and the likelihood is that the UK faces a long period of steady policy. Nonetheless markets and ourselves are sceptical that this move will occur as far in the future as the second half of 2016, as the Bank of England's guidance implies," he said, adding that the debt markets expect a rise in early 2015.

Peter Dixon, UK economist at Commerzbank, said: "As far as the immediate future is concerned, the BoE is expected to remain on the sidelines.

"Although the economy can be expected to lose momentum relative to recent trends, we look for a self-sustaining recovery with GDP growth in the region of 2% next year. This is not an environment in which additional policy activism is required, implying no more QE as well as no rate moves."

Howard Archer, chief UK economist at IHS Global Insight, said: "The already limited likelihood of any further QE appears to have waned further as the good news on the UK economy has been largely sustained – notwithstanding a few blips such as the surprise marked drop in industrial production in August. Meanwhile, any change in interest rates is clearly a long way off whether or not unemployment ends up falling more rapidly than the Bank of England currently expects."

Article Source : http://www.guardian.co.uk

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