LONDON, Dec 23 - The British economy expanded at its fastest pace in a year in the third quarter, stronger than previously thought and lending support to the central bank's decision to raise interest rates by a quarter point last month. But the balance of payments during the same period deteriorated on the back of a widening trade deficit, pushing the current account gap to the highest level since the fourth quarter of 2000. The Office for National Statistics said gross domestic product rose by 0.8 percent in the quarter between July and September, and was up 2.1 percent on the same period a year earlier. This was the fastest quarterly growth since the third quarter of 2002 when it was also 0.8 percent. Last month, the ONS estimated the economy grew by 0.7 percent on the quarter and 2.0 percent on the year. Analysts had expected the data to be unrevised. "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," said Philip Shaw, chief economist at Investec.
The headline GDP numbers came in as a surprise in the light of Monday's downward revision to business investment which had prompted some speculation of a downward revision to growth. The ONS said the upward revision was mostly due to higher estimates for health and social work, business activities, insurance services and wholesaling. Inventories also rose by 1.0 billion pounds in the latest quarter as stocks held by the manufacturing, wholesale and retail sector increased. Gilts and short sterling interest rate futures slipped as dealers bet that the revised figures had made another rate rise more likely. The short sterling market has now priced in at least one 25 basis point hike by the end of the first quarter of next year. Analysts said the Bank of England will be perhaps more concerned about how things are panning out in the fourth quarter. "The signs are it will probably be even stronger, perhaps at one percent on the quarter. The positive signs suggest another rate hike in February," said Alan Castle, UK economist at Lehman Brothers. But the BoE may take some comfort from the rise in the saving ratio to 5.9 percent from 5.3 percent in the second quarter as concerns have mounted recently that spendthrift Britons are taking on more debt than they can afford.
CURRENT ACCOUNT DEFICIT GAPING
The ONS also released data on Britain's balance of payments showing the current account deficit swelled to 8.1 billion pounds from a revised 7.8 billion in the previous quarter. The 8.1 billion pounds deficit is equivalent to 2.9 percent of Gross Domestic Product. In the U.S., their current account gap is around five percent of GDP. The ONS said this was driven mostly by a larger deficit in trade in goods which recorded a shortfall of 11.7 billion pounds in the third quarter. The surplus on investment income has also narrowed to 3.3 billion pounds in the third quarter from the 3.9 billion in the second. The surplus in oil trade fell to 800 million pounds from 1.2 billion in the previous quarter -- the lowest since the first quarter of 1999. "We were expecting some improvement but it didn't come through. We'll probably see it remain around this level, given that trade data has also been very poor," said Lehman's Castle. "That could raise some concerns that the UK is in same position as the U.S. I wouldn't play it up quite that much, but clearly there are grounds for concern and it needs to be watched closely going forward," he said.//