Fighting economy set to go horizontal

UK GDP: The fighting UK economy has done the government a favour. “Not fit for cuts? I’ve just grown by 0.8 per cent!” it reported pugnaciously. The proud pound rose, while gilts fell because the next round of quantitative easing is less likely to come in November. But past growth rates are not a good guide to future ones. Essential government belt tightening will hurt. As house prices fall and consumers fear unemployment, the UK faces a grim 2011 in which a double-dip recession is far from unlikely.

The third-quarter surprise is deceptive. The construction sector is small, but its four per cent uppercut provided one-fourth of the economic growth in the period. And the government increased its spending. But even leaving aside the looming spending cuts, the omens are poor.

House prices have started to fall again and could go a long way. Mortgage approvals in September were down 26 per cent year-on-year. Falling house prices erode homeowners' wealth, making them less likely to spend. Until house prices stabilise the UK economy won't be steady on its feet. But they must hit the canvas before homes are affordable again. Public sector workers, meanwhile, fear the chop. They, too, will hold back from spending.

The private sector, meanwhile, will grow - but needs time to do so. The first impact of reduced government spending will be to deprive companies of business. The risk that unemployment rises from its current level of 2.5 million is very high.

What, then, do the third quarter figures change? The government will say the economy is fit enough to shed a few pounds. Andrew Sentance, the only Bank of England monetary policy committee member calling for higher interest rates, will feel vindicated. And the opposition can rehearse its line for next year: that economy was getting better until George Osborne, the chancellor, hit it by slashing spending.

But Labour was itself planning £50 billion of cuts. It's impossible to keep running a deficit of 10 per cent of GDP forever. The UK economy's got to fight on its own. It will do, but faces at least a year of hard graft - and possible spells on the canvas.