Analysis: The coalition and third quarter GDP

The coalition government will be taking a brief breather after better than expected GDP numbers released this morning.

The British economy grew 0.8% in the third quarter, 40 basis points higher than average estimates.

The results came just a day after Prime Minister David Cameron unveiled a growth plan to help compensate for the coalition’s upcoming spending cuts, following criticism that the growth package in the comprehensive spending review (CSR) was insufficient.

It may also help the coalition avoid a second round of quantitative easing (QE), a controversial move which would have seen the Bank of England put billions of pounds onto private sector balance sheets, most likely in exchange for gilts.

Jamie Dannhauser, a senior economist at Lombard Street Research, says “the case for more QE this year, if at all, seems very shaky”, despite the fact that financial markets are already pricing it in.

“Our position is that the available evidence does not suggest that a shortage of money, which can be remedied by further asset purchases, is constraining demand growth. As such, the MPC [the Bank of England’s Monetary Policy Committee] has no need to change its monetary stance,” he says. (article continues below)

However, the question still remains as to whether the third-quarter GDP numbers represent a half-normal recovery or a short-lived, abnormal bounceback from Armageddon-scenario cost cuts last year.

Azad Zangana, a European economist at Schroders, has joined those who say the growth figures have made quantitative easing unnecessary as an abnormal policy option.

In response to a Fund Strategy article on the comprehensive spending review last week, he says that even if employment growth is now a quarter of normal levels, the private sector will add 1.7m jobs over the next Parliament, offsetting the 500,000 projected job losses in the public sector and helping safeguard the economic recovery.

Given the unprecedented nature of the financial crisis, however, it is still uncertain as to whether comparisons to normality can be justified, particularly given extraordinary government spending and stimulus and deep projected cuts over the next half decade.

Despite an average annual GDP growth of 2.7% in the first half of this year, higher than Britain, America is still considering a second round of quantitative easing, for instance, as uncertainties over the sustainability of the recovery kick in.