The main reason for the increase was a higher estimate of the contribution from the service sector. This was fairly broadly based with both the public and private sectors posting bigger rises than was previously indicated.
On the expenditure side there were upward revisions to the contributions from both households and businesses at the expense of government consumption. Household spending is now estimated to have grown by 0.9 per cent in third quarter of the year; this is the fastest quarterly gain since the final three months of last year.
The upgrade to the third quarter GDP estimate allied to modest changes to previous data means that the Chancellor’s forecast in his Pre Budget Report for full year growth of 2.1 per cent is likely to be spot on. Growth in 2002 is now put at 1.3 per cent rather than 1.4 per cent.
The latest numbers indicate that the health of the corporate sector is continuing to improve with profits at a new record level and the year on year rate of gain at its highest level since the second quarter of 1999. There is also further evidence that companies are continuing to pay down debt; this is the sixth consecutive quarter that the sector has, in aggregate, been a net lender rather than a borrower. As was reported yesterday, there is currently still a reluctance on the part businesses to step up capital expenditure.
The data, meanwhile, casts some doubt over the extent to which households have been overextending themselves, notwithstanding the upward revision to consumer spending. The household savings ratio climbed to 5.9 per cent from 5.3 per cent in the first half of the year. Although still low by historic standards this is well above the levels seen in the early part of 2000.
That said, total borrowing of the household sector in the third quarter climbed to 133 per cent of disposable income which is another new record. Significantly, however, there was also a sharp rise in the value of financial assets which more than offset the increase in debt and took the net financial worth of the household sector to its highest level since the second quarter of 2002.
The current account deficit widened in the third quarter to £8.1bn. This is the largest shortfall since the fourth quarter of 2000. The main reason for the deterioration was a combination of a worsening in the trade balance and a drop in net investment income. For the whole of 2003, the deficit could now reach £26bn which would rival the record shortfall accrued in 1989. However, when measured as a share of GDP the current picture looks rather less bleak. In 1989, the deficit exceeded five per cent of GDP. This year it is likely to reach only 2.4 per cent of GDP.
Productivity figures released this morning provide more reason for encouragement showing a pick up in output per job across the whole economy back towards the trend rate. As a result, unit wage costs increased by just 0.6 per cent over the quarter.
Today’s data provides a mixed message for policymakers. The upward revision to growth, the confirmation that the household debt to income ratio has hit a new high and the rebound in profits will strengthen the hands of the more hawkish policymakers. On the other hand, the continued preference of the corporate sector to pay down debt rather than lifting investment and the rise in the household savings ratio warrants a measure of caution. We still expect the MPC to hold fire in January. Whether policy is tightened in February will, in part, depend on the ability of the household sector to shrug off any post Christmas hangover.
