The cloud in the silver lining: GDP grows due to ‘special factors’

Britain finally emerged from recession today, but in a manner which inspired only cautious optimism from economists.

GDP rose by one per cent in the third quarter of 2012, the highest growth rate since 2007 and considerably higher than expected.

Production and the service sector grew but construction shrank significantly by 2.5%, probably as a result of cuts to government spending.

Most analysts suggested the boost came because of the Olympics and companies recovering production lost because of an extra public holiday in June.

"These figures are affected by special factors," the Office of National Statistics (ONS) said.

Analysts suggested that the extra bank holiday would have contributed 0.5% and the Olympics 0.2%, putting real economic growth at 0.3% – well within the ONS' 0.7% margin of error.

The unique nature of the two causes means the government is unlikely to get much credit for the improvement in the economic outlook.

"What that proves is that government spending can stimulate the economy without detrimental consequences," Richard Murphy of Tax Research UK commented.

"It's bad because the Olympics is over, there's nothing to replace it and there are massive further cuts in progress."

A Goldman Sachs report from before the Games predicted indirect effects from the additional expenditure on the Olympics would help the economy, but suggested the long-term effect of the boost would be limited.

"It is difficult to estimate what the net effect of the indirect and other offsetting effects will be," the report found.

"As a central estimate, we have assumed that these effects will net out and that the overall short-term effect of staging the London Olympics will be to boost UK economic output in Q3 by around 0.3% to -0.4%. This short-term benefit will be largely reversed in Q4."

But the strength of the growth suggests there are background reasons for optimism beyond the Olympics.

"There is still a long way to go but these figures show we're on the right track and are a sign the economy is healing," George Osborne commented.

Shadow chancellor Ed Balls said: "A one-off boost from the Olympics is welcome but it is no substitute for a plan to secure and sustain a strong recovery."

Even on one per cent growth, however, the figures show Britain's growth was totally flat for 2012.

Economic analysts warned that while GDP was growing living standards would continue to fall. ONS figures from earlier this week showed national income per head had fallen by 13.2% in real terms since the start of the crisis in 2008.

"The difficulties faced by the UK economy are not fully reflected in today's growth figures. Living standards are falling, productivity growth is weak, and the economy has, in fact, been flat over the last year," Philip Booth, editorial drector at the Institute of Economic Affairs, said.

"It is likely that we are leaving recession but entering a period of unspectacular recovery – quite unlike the recovery from previous recessions."

Bank of England governor Mervyn King warned earlier this week that any recovery would be slow, especially given the slowing growth of emerging economies in China and India and the threat of Germany being pulled into the eurozone crisis.

David Cameron appeared to prematurely reveal the GDP figures yesterday in a reference to "more good news to come" during PMQs, although Downing Street spokespeople insisted he was not referring to today's statistics.