Revised GDP figures continue to portray a solid economic recovery, with nominal demand growing above a rate likely to be compatible with the inflation target over the medium term.
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GDP grew by 2.7% in the year to the third quarter, revised down from 2.8%. Assuming, conservatively, a quarterly gain of 0.5% in the current quarter, full-year growth will be 1.7% versus a consensus forecast of 1.3% in December 2009.
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The official GDP series relies on output data; an expenditure-based estimate rose by 2.9% in the year to the third quarter (i.e. adding back the "statistical discrepancy").
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Encouragingly, annual growth in business investment was revised up substantially, from 4.6% to 8.9%, showing that spending is responding as expected to an earlier strong improvement in corporate liquidity – see first chart. Also, the household saving ratio rebounded from 3.5% to 5.0% in the third quarter, implying that consumers have more in reserve as high inflation and tax hikes constrain real income expansion. Stockbuilding, meanwhile, was modest last quarter, at 0.1% of GDP.
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Discouragingly, the previously-reported improvement in net exports in the third quarter has been revised away, dashing the MPC's hopes that "the necessary rebalancing towards net trade might have begun" (according to the December minutes).
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The annual increase in the GDP deflator at market prices was revised down from 3.0% to 2.4%, accounting for the bulk of a reduction in nominal GDP expansion from 5.9% to 5.1%. The latter figure, however, was depressed by a large rise in the trade deficit between the third quarters of 2009 and 2010, partly reflecting surging import costs. A more appropriate focus for the MPC is nominal domestic demand, which rose by an annual 6.8% (revised from 7.1%) – the fastest since 1999.
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Relative to the pre-recession peak, GDP is slightly ahead of the level at the corresponding stage of the early 1980s recovery, which followed a recession of comparable scale (slightly deeper if measured by GDP excluding North Sea oil and gas production) – second chart.
