Brighter times?

The economy returned to growth after suffering six quarters of contraction that extended from the second quarter of 2008 to the third quarter of 2009 and saw the economy shrink by 6.1 per cent. Over the course of 2009 as a whole, gross domestic product fell 3.2 per cent, the biggest annual fall since 1949.
The Bank of England has been more optimistic with its forecasts than City economists and sterling fell following the release of the figures.
Gilts rallied, however, as investors bet the anaemic growth would damp any appetite by the Bank of England to raise interest rates.
”Fiscal consolidation will likely intensify over coming quarters and in a weak growth environment the likely result is that interest rates will be kept low to compensate,” said James Knightley, economist at ING. ”As a result, rather than seeing the Bank of England raise rates to between 5 and 6 per cent as in previous cycles, the eventual peak in UK rates this time round may be closer to between 3 and 4 per cent.”
Against the euro, its main trading partner, the pound weakened to 87.36p from 86.95p ahead of the data. It also fell against the dollar at $1.6128 from about $1.624 before the news. Gilts rose across the board, sending yields between 4 and 5 basis points lower, which left the two-year note offering 1.236 per cent and the 10-year at 3.855 per cent.
Both the service sector and industrial output grew during the final three months of 200 but activity in the construction industry was flat.
The service sector received a boost from motor trades and retail, which helped distribution, hotels and restaurants increase output by 0.4 per cent in the quarter.
Transport, storage and communication services also grew – by 0.7 per cent – and government services grew by 0.2 per cent.
Business services and finance was the only subsector of services to see a further contraction, with output falling by 0.8 per cent thanks to a decline in banking.
Manufacturing expanded by 0.4 per cent, helping industrial production to grow as output from utilities dropped by 3.3. per cent.
Excluding volatile output from oil and gas extraction, the economy grew by 0.2 per cent after being flat in the third quarter.
The emergence of the UK from the recession will give Labour a boost as it heads towards the election.
A Treasury spokesman said: ”The Chancellor has always said that the economy would return to growth by the turn of the year, and today’s estimate of 0.1% growth in the fourth quarter bears that judgement out.
“What this estimate makes clear is that the Government is right to be confident but cautious about the prospects for the economy and that it is right that we keep supporting the economy.“
However, the UK is the last major economy to emerge from recession, after Germany, France, the US, Japan and Italy all started to grow again last year.
It is also highly possible that the UK slips back into recession in the first quarter after VAT was raised back to 17.5 per cent in January, and bad weather hit the country early in the month.
“Gordon Brown’s promise that Britain would lead the world out of recession lies in tatters,” said George Osborne, shadow chancellor, in a statement on Tuesday. “We were one of the first in and now, today, we are the last out.”
But Simon Hayes, economist at Barclays Capital, pointed out that within the OECD, 13 countries have seen larger peak-to-trough falls in GDP in the current downturn than the UK, including Japan, Germany, Italy and Sweden.
“The Q4 GDP figures are a major blow to hopes that the UK economy had emerged decisively from recession in Q4,” said Jonathan Loynes of Capital Economics.
“The disappointment came mainly in the services sector, which grew by just 0.1 per cent rather than the 0.5 per cent or 0.6 per cent rise suggested by the business surveys.”
The return to growth will add to the sense that the Bank of England may not be far from pausing quantitative easing – its programme of creating money to buy government debt in order to help end the recession and foster the recovery.
The next meeting of the Bank’s monetary policy committee is in early February, and it is widely expected not to go beyond the £200bn it has already committed.
However, recovery is far from certain – even the growth racked up in the fourth quarter was probably partly the result of temporary factors that will ebb away this year.
The economy will have received a temporary boost during the quarter as consumers moved to spend ahead of the rise in value added tax back up to 17.5 per cent in January. Car sales also appear to be receiving a lift from the government’s car scrappage scheme.
A slower than expected recovery would leave the UK’s public finances in an even more precarious position. It could also jeopardise the Conservative party’s plans to cut spending more aggressively.
One key hope is that the fall in the pound during the recession will boost growth as British goods become more competitive abroad, and consumers and businesses switch towards buying British goods away from more expensive imports.
The first estimate of GDP growth is based on only about 40 per cent of the data that goes into later, more complete estimates, and so can be prone to large revisions.
Jo Grice, the head of the Office of National Statistics, said that the surveys it conducts in order to estimate GDP had a higher than normal response rate.