Economic growth 'is lower than we thought' admits ONS

CHANCELLOR George Osborne was yesterday dealt a second economic blow in just two days after it emerged that the economy has expanded less than previously thought.

• George Osborne: Second blow in two days

The Office for National Statistics (ONS) revised down its growth figures for the first, second and third quarters while there are concerns that fourth-quarter data, which will be published next month, will reflect the economic damage caused by the recent poor weather.

GDP growth for each of the three quarters was reduced by 0.1 per cent, taking the most recent period, from July to September, to 0.7 per cent. First and second-quarter expansion was downgraded to 0.3 per cent and 1.1 per cent respectively, down from 0.4 per cent and 1.2 per cent.

The revisions, described as "disappointing" by economists, come just a day after figures showed public-sector borrowing shot to a record monthly high in November.

The coalition government will now have a far bigger task on its hands to turn the economy around in 2011 with both the recovery and public-sector borrowing in a far less stable condition than previously believed.

Vicky Redwood, senior UK economist at Capital Economics, said: "The upshot is that a continued strong recovery seems far from assured - we expect GDP growth of just 1.5 per cent next year."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We expect growth to lose significant momentum over the coming months as fiscal tightening increasingly bites and adds to the pressures on already stretched consumers. Furthermore, the rebuilding of inventories may nearly have run its course now."

Archer has predicted 0.5 per cent growth for the closing three months of the year but admitted that even this is now looking in doubt.

"There are now serious downside risks to this forecast and it may well prove too optimistic given the serious hit to economic activity in December from the severe weather," he said. "Much will depend on how much further activity is disrupted over the final days of the year."

The ONS downgraded construction growth for all three quarters of the year but the third quarter also saw weaker than previously predicted expansion in the production industries, business services and finance.

Any hopes Osborne and other policymakers may have been harbouring about a consumer-led economic boost were also dashed by the revelation that households are squirreling away their money, There was a quarter-on-quarter increase in savings between July and September.

However, economists said there was some small cause for optimism in yesterday's ONS data, with a rise in business investment in the third quarter.This proves that firms are thinking ahead and preparing themselves for expansion, economists said.

Azad Zangana, European Economist at Schroders, said: "The higher business investment is especially encouraging as it shows that despite the headwinds of lower domestic demand and tougher lending conditions, businesses are managing to raise capital and choosing to expand their capacity."