UK growth puts rate rise on the agenda

Britain's economy grew more quickly than expected in the third quarter of the year, supporting City expectations that interest rates are likely to rise early in the new year.

The economy expanded by 0.8% in the three months to the end of September, the fastest pace since the same quarter last year, according to the Office for National Statistics.

Yesterday's revised figure surprised the City, which had been expecting the ONS to stick to last month's initial estimate of 0.7% growth. Overall GDP was 2.1% higher than at the end of September 2002.

"The upward revision shows that output growth was unambiguously above trend during the third quarter and is bound to get the monetary policy committee talking about rate increases at its next meeting, in January," according to Philip Shaw, chief economist at Investec.

Attention will focus on whether the economy continued to pick up speed over the last three months, with financial markets pricing in a least one more base rate rise of 0.25 percentage points before the end of next March.

"The signs are that [growth] will be even stronger, perhaps at 1% on the quarter. The positive signs suggest another rate hike in February," Lehman Brothers UK economist Alan Castle said.

Manufacturing output rose by 0.1% over the third quarter, while construction grew by 2% and service industries by just under 1%. Oil and gas extraction was down 2.6%.

The fall in oil output helped to push Britain's trade balance deeper into the red. The deficit rose to £8.1bn from £7.8bn in the previous quarter, with oil contributing a net £805m, down from £1.23bn and the lowest level since 1999. The deficit on trade in goods was up from £11.2bn to £11.7bn.

"We were expecting some improvement [in the trade figures] but it didn't come through," Mr Castle said, adding that Britain's trade position, with the deficit the equivalent of almost 3% of GDP, could attract comparison with that of the US, where the deficit is running at about 5% of GDP. "I would not play it up quite that much but clearly there are grounds for concern."

Yesterday's ONS figures showed that the household savings ratio rose from 5.3% to 5.9%, although much of the change was due to technical factors and is unlikely to mark a decisive shift in borrowing patterns.

Yesterday's data had little impact on the pound, which held steady against the dollar and the euro.

"Net-net the data is better than expected. The upward revision to Q3 growth meant growth has been slightly stronger than expected," said Kamal Sharma, currency strategist at Dresdner Kleinwort Wasserstein in London.

"The current account was slightly disappointing but broadly neutral. There was very little impact in sterling generally."

The ONS said the public sector current budget was £3.5bn in deficit in the third quarter and that public sector net debt was running at 32% of GDP.