Double-dip slump is staved off, for now

By DAN ATKINSON, MAIL ON SUNDAY ECONOMICS EDITOR
Updated: 17:27 EST, 18 December 2010

Festive cheer is expected on Wednesday, with figures likely to confirm that the economy powered ahead by 0.8 per cent in the third quarter of this year.

The post-recession bounceback will banish for now fears of a double-dip slump, but the picture is likely to darken on the other side of New Year.

Public spending cuts, the rise of VAT from 17.5 per cent to 20 per cent and stubbornly high inflation will act as a drag on the economy in 2011.

Burden: Public spending cuts, the rise of VAT and stubbornly high inflation will act as a drag on the economy next year

In addition, businesses are no longer building up their stocks to the same extent as they did in the immediate aftermath of the recession, which ended in the fourth quarter of last year.

Wednesday will see the third and final official estimate of the growth of gross domestic product in the third quarter of this year, and most forecasters expect no change on the most recent estimate of 0.8 per cent.

The final quarter of this year is likely to have been a little more sluggish, with a 0.6 per cent expansion in GDP.

'I think we will see the 0.8 figure hold,' said Peter Dixon, strategist at Commerzbank. 'The real question is to what extent Britain slows down next year - businesses are no longer rebuilding their inventories and there will be less demand from the Government, so we will need to improve our trade performance in order to maintain a good growth rate. Whether we can do so is open to question.'

Headline estimates for final growth numbers this year and next - about 1.8 per cent and 2.2 per cent respectively - would suggest faster growth next year.

But George Buckley, economist at Deutsche Bank, said this was misleading.

'You need to take into account the recessionary levels of 2009 from which this year's GDP had to recover to get the proper measure of the growth achievement in 2010,' he said.

'Once you have factored that in, you see that average quarterly growth this year is likely to have been about 0.7 per cent, against a likely 0.5 per cent for next year.'

Andrew Smith, chief economist at accountant KPMG, said: 'I would expect no change on the 0.8 per cent estimate for the third quarter.'