MercoPress. South Atlantic News Agency

Exports help UK economy expand but tight budget contracts domestic demand

More than one opinion in the Bank of England about the next steps

United Kingdom’s export growth helped the economy extend its recovery in the third quarter as growth in consumer, government and investment spending slowed by more than half. GDP rose 0.8% from the previous three months, when it increased 1.2%, the Office for National Statistics said Wednesday in London.

Data shows exports rose 2.2% after a 2.3% increase in the previous three months. However it’s not clear what can happen ahead as the UK coalition government implements the biggest budget cuts since World War II and strains in Ireland, the UK’s fifth-biggest export market, and the Euro area deepen.

The outlook has divided Bank of England policy makers as they debate whether to expand bond purchases or raise the key interest rate to tame inflation.

Consumer spending growth slowed to 0.3% in the third quarter from 0.7% in the previous three months, the statistics office said. Government spending rose 0.4%, down from 1%, and investment growth eased to 0.6% from 1.4%. Imports rose 0.7% and net trade contributed 0.4% percentage points to GDP. Inventories added 0.1 percentage points.

A separate report showed business investment fell 0.2% in the third quarter from the previous three months. It was up 4.6% from a year earlier. An index of services in September rose 0.6% from the previous month.

The Euro-area economy is also cooling. GDP growth slowed to 0.4% in the third quarter from 1% in the previous three months. In the U.S. growth was an annual 2.5% in the third quarter, data showed Tuesday.

As the Euro-area’s debt crisis mounted over the past month, Bank of England Governor Mervyn King noted the risk to the UK from the region, saying that growth in the currency area is “a very important ingredient” to U.K. prospects.

A day after Ireland sought aid from the European Union on Nov. 21 Chancellor of the Exchequer Geroge Osborne pledged billions of pounds to help the country shore up its finances. Osborne said trade and banking links mean it’s in Britain’s interest to provide support.

The Organization for Economic Cooperation and Development, OECD, said that U.K. growth will “remain subdued” in 2011 as the spending cuts bite. Government’s plans to reduce the deficit to 2% of economic output by 2015 from more than 10% today involve 490,000 public-sector job losses and sweeping welfare cuts.

Nevertheless, the economy will gain momentum in 2012 as the global recovery drives exports and higher business confidence spurs corporate investment, the OECD said. The Paris-based group said the central bank should start rising the key rate from a record low of 0.5% in the second half of 2011.

Bank of England policy makers split three ways on the need for further stimulus in the economy for a second month at their November meeting. Adam Posen called for a 50 billion-pound increase of the current 200 billion-pound bond-purchase plan, while Andrew Sentence continued a push to raise the key rate from 0.5% as inflation held above the government’s 3% upper limit.