UK growth rate hits three-year high

The UK economy grew at its fastest annual rate in three years in the last quarter as activity in the services sector held up despite worries about the recent turmoil in the capital markets. The Office for National Statistics said in its first estimate of third quarter growth that gross domestic product grew by 0.8 per cent between July and September, above expectations of a 0.7 per cent rise and above the trend rate. The annual growth rate rose from 3.1 per cent to a three-year high of 3.3 per cent.

Business services and finance grew at a healthy 1.7 per cent, the same rate as the previous quarter, suggesting the sector has not yet suffered any widespread damage resulting from the financial market turmoil towards the end of the quarter.

The strength in private sector sevices offset slower growth in manufacturing production and a flat contribution from the public sector.

“The strong increase... confirms that any slowdown in the UK economy over the next year or so will come from a very solid starting point,” said Jonathan Loynes at Capital Economics.

The pound strengthened after the figures reinforced expectations that the Bank of England would keep interest rates on hold until there were clearer signs of the economic slowdown it thinks necessary to keep inflation on target.

Richard McGuire, strategist at RBC Capital Markets, noted that the Bank of England had never cut interest rates after a quarter of above trend growth in its ten years of independence.

“We continue to see growth slowing sharply going forward, but for the time being upbeat real economy news should keep the Bank of England on hold for the rest of this year,” said George Buckley, economist at Deutsche Bank.

“Ongoing above-trend growth in the third quarter is likely to reinforce the Bank of England’s concerns about capacity constraints,” said Howard Archer, economist at Global Insight. “Along with recent data showing buoyant retail sales in September and a still healthy labour market, this dilutes the case for an interest rate cut as soon as November.