UK gets out of recession with a bang

The UK's gross domestic product (GDP) increased by 1% in the third quarter, beating analyst expectations and reversing a contraction of 0.4% in the second quarter, data from the Office for National Statistics (ONS) showed.

The economy was flat on the year. A Reuters poll of analysts had forecast a 0.6% increase in GDP between July and September and a contraction of 0.5% year-on-year.

The FTSE was up on the news and the pound (GBP) jumped versus the dollar (USD) and the euro (EUR).

The third-quarter GDP estimate "was affected by the changes made to the quarter two Bank Holidays in May and June 2012 as part of the celebrations for the Queen's Diamond Jubilee," the ONS said. "Over the second quarter, this resulted in one fewer working days."

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In addition to this, the third-quarter GDP estimate was affected by the Olympics and Paralympics, which took place between July 27 and September 9, the ONS said.

Tickets for the events were sold throughout 2011 and 2012 but "in accordance with national accounts principles, these have been allocated to the third quarter, when the output actually occurred," it said.

CAN UK KEEP GROWING?

Olympic ticket sales were estimated to have boosted the third-quarter GDP of the UK, which gets about 10% of its imports from the BRIC (Brazil, Russia, India and China) countries, by around 0.2 percentage points.

Employment activities strengthened in the quarter, the arts and entertainment sector, which had been showing strength "for some time," showed "quite strong growth," hotels had greater activity, and there was some strength in the food and drink sector, land transport and retail, the ONS said.

Looking at GDP components, agriculture, forestry and fishing posted the strongest growth in the quarter, of 2.2%, after a 2.6% fall in the second quarter.

Services increased by 1.3% after a 0.1% fall in the previous quarter, with distribution, hotels and restaurants up by 1.6% , government and other services increasing by a similar amount and business services and finance up 1%.

Manufacturing was up 1% after the second quarter's 0.8% fall, with water supply and sewage jumping by 4.1%.

The construction sector's fall slowed to 2.5% from the second quarter's 3% contraction.

"We think that the extra bank holiday in June knocked about 0.5% off output in Q2 and added a similar amount in Q3 as output got back to 'normal,'" Vicky Redwood, chief UK economist at Capital Economics, said.

But she warned that "it certainly won’t be plain sailing from here on" as 0.7% of the third-quarter GDP was probably added by the temporary effects of the bank holiday adjustment and the Olympics.

"GDP in the third quarter was no higher than a year ago and is still just over 3% below its pre-recession peak," said Redwood. "And as the Olympic effects unwind, it is still possible that the economy contracts again in the fourth quarter."