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U.K. Economic Growth Quickens on Investment, House Building

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New Residential Construction In Northampton
Within business investment, the ONS said there were increases in transport equipment and new buildings including construction of homes. Photographer: Chris Ratcliffe/Bloomberg

Nov. 27 (Bloomberg) -- Britain’s economic recovery accelerated in the third quarter as investment and house building helped to offset the biggest drop in exports in more than two years.

Gross domestic product increased 0.8 percent, matching an initial estimate, the Office for National Statistics said in London today. Business investment rose 1.4 percent, while exports dropped 2.4 percent, with net trade knocking 0.9 percentage point from GDP.

The Bank of England raised its growth forecasts this month and brought forward the expected timing for unemployment to reach the 7 percent threshold for policy makers to consider raising the key interest rate. Governor Mark Carney yesterday affirmed officials’ guidance that they won’t rush to raise rates while there’s still slack in the economy.

“The further improvement in many of the timely business surveys suggests that the economy will continue to grow strongly in the fourth quarter,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “With firms now showing signs that they are willing to spend their cash stockpiles and the pound still at a relatively weak level, it seems likely that the recovery will become better-balanced soon.”

The pound strengthened to an 11-month high against the dollar after the data. It traded $1.6286 as of 10:33 a.m. London time, having earlier risen to $1.6294, the highest since Jan. 2. The yield on the benchmark 10-year U.K. government bond was up 2 basis points at 2.75 percent.

Domestic Drivers

Growth is primarily being driven by domestic factors as the euro area, Britain’s biggest trading partner, struggles to recover. The increase in business investment helped to lift gross fixed capital formation by 1.4 percent in the third quarter, and it added 1.1 percentage points to GDP.

Within business investment, the ONS said there were increases in transport equipment and new buildings including construction of homes.

A revival in property demand, in part fueled by a government program, is helping to boost housing activity. Investment in private-sector dwellings jumped 5.9 percent in quarter through September, the most in two years, the ONS said.

Consumer spending rose 0.8 percent, an eighth consecutive quarterly increase, while government spending increased 0.5 percent. Imports rose 0.4 percent.

“Under the surface the breakdown was not particularly pleasing,” said Alan Clarke, an economist at Scotiabank in London. “Most of the heavy lifting is coming from the consumer and stock building. That is not a great long-term prospect for growth.”

Services Growth

Today’s release confirmed a report last month that services, the largest part of the economy, expanded 0.7 percent in the third quarter from the second. Production growth was also unrevised at 0.6 percent, while expansion in construction was revised to 1.7 percent from 2.5 percent.

While Britain’s economy is growing, it remains 2.5 percent smaller than before the crisis. The BOE has pledged to support the economy by keeping its key rate at a record-low 0.5 percent at least until unemployment reaches at least 7 percent. The OECD said monetary policy is expected to start to normalize in the last quarter of 2015, according to inflation and unemployment projections.

Speaking to Parliament’s Treasury Committee yesterday, Carney raised questions about the reliability of some ONS data, particularly investment, saying he doesn’t put “full weight” on the numbers.

“It doesn’t entirely feel right that investment, as measured, is falling at a time when we see strengthening investment intentions,” he said. He added he “was much more comfortable” with the official data produced in Canada when he was the governor of the central bank there.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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