Detailed breakdown of GDP figures provides warning against Tory plans

The detailed breakdown of Q3 GDP is now available and provides an interesting picture of the state of the UK economy and some clues for policy makers. The numbers show the positive effects of Government policy and provide a warning against Tory plans for ‘export led growth’.

The headline figure for Q3 growth was revised up from a previously estimated fall of -0.4% to a fall of -0.3%. However the economy remained in recession and the breakdown provides much to be cautious about:

The chart above shows the contribution of the various components of GDP to growth since the beginning of the recession.

The best news came from household consumption, which remained flat over the quarter (although still 3.7% below the Q1 2008 peak). This is the first time that consumption has not subtracted from growth in 18 months. The ONS notes that this was driven by ‘a strong increase in expenditure on motor vehicles’, indicating a success for the Government’s ‘cash for clunkers’ policy.

Government Consumption continued to add to growth. It is now up 1.9% in the past year – a modest increase.

Gross Capital Formation continued to fall – although by less than previous quarters. The ONS notes that ‘There was a significant increase in government investment’. Despite the prop of increased government investment, gross fixed capital formation is 14.2% lower than one year ago.

Net Trade subtracted from growth for the first time since the beginning of the recession as the UK trade balance widened. This is a worrying development and one that casts doubt on Conservative plans for export led growth.

Overall the numbers give the impression that the recession is nearing its end. They emphasise both the positive role the government has played in easing the pain and the need for caution in any exit plans.

Government action, in the form of increased spending, ‘cash for clunkers’ and increased investment provide the only positives. It is vital not to withdraw this support too early and it may well be that more action is required, especially on investment (in light of yesterday’s figures) to put the recovery on a stable footing.

The net trade figures provide a clear warning against Tory plans to rely on ‘export led growth’.