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UK economy swiftly running out of growth sectors


The rise in GDP in the third quarter masked a fall in construction. Photograph: Roger Bamber/Alamy

Building firms are usually the first into a recession and the fastest out of the blocks when confidence returns. With a lift in confidence comes a return to soaring land values, something that spurs them to unwrap mothballed cranes and mix up the cement.

Not in this recession. The absence of business and household confidence has dampened demand. Making matters worse for this most cyclical of industries, the Bank of England's low interest rate policy has prevented the usual dramatic fall in house prices during the crash and consequent upswing when the worst of the recession is over. A lack of mortgages and commercial loans from lending institutions is also a prominent feature of the post-recession scene. In response, builders have kept under lock and key their massive landbanks of sites ripe for development.

The Office for National Statistics found construction industry output shrank 4% in the year to the end of September and 0.6% on the previous quarter.

Construction accounts for 7.2% of the economy and in the past has provided a strong impetus for growth out of recession.

Some analysts have argued the survey of construction by the ONS has underplayed its recovery, others say growth remains depressed and only clocked up positive figures last year as building on the Olympics site and London's tallest building, the Shard, fed into the figures.

Whichever way the figures add up, it's not a positive result. The same can be said of manufacturing, which was supposed to lead the country out of recession as part of a re-balancing away from sectors like construction. However, manufacturing was subdued and extra spending on gas and electricity following huge energy price hikes accounted for most of the growth in "production industries".

One-off factors also played a part in the ONS asking analysts to take overall figures for the second quarter of the year and the third together to get a more rounded picture of the economy's health.

The royal wedding and Japanese tsunami played havoc with official data in the spring and contributed to the exceptionally low 0.1% growth figure in the second three months of 2011. Taken together with the 0.5% in the third quarter, growth averaged 0.3% in each of the last two quarters, half the 0.6% per quarter clocked up by the UK economy in previous recoveries.

Looking back over the full year, the ONS says growth was 0.5%, or 0.125% in each quarter, which is likely to be the weakest of any eurozone country except Greece and well below US growth of 2.5%.

Unlike the US, where manufacturing production and business investment are prominent, the UK was saved from sinking back into recession by the banking industry, telecoms, computing and government spending.

A look at the banking sector shows it had nowhere to go but up after sinking to the point of near bankruptcy in the crash. Profits at Barclays were up in the first nine months of the year. HSBC, with its largely foreign revenues, should also see profits up this year. Yet the next year is expected to be less rosy, especially for state-owned Lloyds and Royal Bank of Scotland, with the euro crisis persisting and lending still low.

The supertanker that is Whitehall has continued sailing straight ahead, at least when it concerns spending on health and education, with a rise of 0.5% on the previous quarter, but spending is expected to turn south within the next year as harsher cuts take effect. Which leaves telecoms and computing to offset retrenchment in other sectors.

Can the UK build growth on a desire to own a tablet computer or smartphone? It will take more than that.

Original author: Phillip Inman
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