UK Economy Accelerates but Global Weakness Holds Back Recovery

The pace of economic expansion in the UK is quickening in the third quarter as the three major sectors - services, construction and manufacturing - all defy forecasts and a recovery from the financial crisis looks finally to have taken hold.

According to a monthly GDP estimate by the National Institute of Economic and Social Research (NIESR), the UK economy grew by 0.9% in the three months to the end of August, up from the second quarter's official reading of 0.7%. The third quarter ends in September.

Private industry data compiled by research firm Markit shows service sector output hitting a 19-year high in August, manufacturing firms booming again with activity at two-year peaks, and the construction sector witnessing a "new dawn" with its sharpest growth rate in six years.

However, risks to the recovery remain.

"The rate of growth will likely soften over coming quarters," said the NIESR report.

"The external environment in the guise of weak demand from the euro area and slowing emerging markets will likely limit the rate of the UK's economic expansion."

The NIESR said the level of GDP is 2.7% below its pre-2008 peak.

Several forecasters have lifted their UK growth estimates after the economy defied expectations. The Bank of England, International Monetary Fund, and British Chambers of Commerce have all grown more optimistic about the UK's burgeoning recovery.

The OECD recently hailed the blossoming recovery in advanced economies across Europe and in the US, but warned it could be blown off course by significant risks from the financial world and the Federal Reserve tapering its market-underpinning $85bn-a-month stimulus programme.

"There are two major risks. One is that the euro area remains weak and fragile and the financial and banking system needs to be fully repaired," said Pier Carlo Padoan, deputy secretary-general and chief economist of the OECD.

"The other risk is that also triggered by the tapering off of unconventional monetary policy in the United States. These emerging economies are suffering from strong capital outflows and currency depreciation, which could drag [on] their growth further."

China recently warned the US Fed Reserve to play its quantitative easing taper carefully.

"The US economy is showing some positive signs and is recovering gradually and we welcome this," China's Vice Finance Minister Zhu Guangyao told a news conference in Beijing.

"But the United States - the main currency issuing country - must consider the spill-over effect of its monetary policy, especially the opportunity and rhythm of its exit from the ultra-loose monetary policy."