GDP growth of 0.8% in the third quarter should scotch any discussion of "QE2" at next week's MPC meeting. GDP has now recovered 40% of its loss between the first quarter of 2008 and the third quarter of 2009. Even assuming that growth slows to 0.4% in the fourth quarter, GDP will increase by 1.8% in 2010 versus a consensus forecast of 1.3% at the start of the year. Relative to the previous peak, GDP is higher than at the equivalent stage of the early 1980s recession / recovery.
Other points:
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A monthly GDP estimate derived from data on services and industrial output was 0.4% above its third-quarter average in September, implying positive "carry-over" into the current quarter – see first chart.
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Sceptics will point to the significant, and unsustainable, contribution to recent growth from construction and government services. Excluding these sectors, however, output still grew by 2.6% in the year to the third quarter.
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It is wrong to assume that coming public spending cuts imply a decline in government services output. To the extent that cuts fall on transfer payments and public sector wages, there is no impact. Government services output rose by 8.8% over 1992-97 despite a 5.5 percentage point fall in the public spending share of GDP between 1992-93 and 1997-98.
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Third-quarter GDP was 3.9% below its peak level in the first quarter of 2008, compared with a maximum decline of 6.5% in the third quarter of last year. At the equivalent stage in the early 1980s (i.e. in the fourth quarter of 1981, 10 quarters after the peak in the second quarter of 1979), GDP was 4.4% lower – second chart.
