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LONDON: Britain’s economy relied more heavily on spending by households for growth in the third quarter despite a fall in take-home incomes, underscoring the challenges of getting the recovery onto a sounder footing.
In another disappointing sign for policymakers, business investment was weaker than in an earlier reading of how Britain’s economy fared from July to September.
Official data also showed Britain’s current account deficit matched a record high in the third quarter, hurt in large part by lower returns on foreign investment, sending sterling lower.
Samuel Tombs, an economist with consultancy Capital Economics, said the numbers left Britain’s recovery looking even more unbalanced, but the economy was still likely to grow about 3 percent next year.
“Despite this somewhat bleaker assessment of the UK’s recent economic performance, there remain plenty of reasons to be optimistic on the outlook for 2015,” he said, citing the fall in oil prices and more recent signs that pay growth is picking up.
Britain’s yearly growth rate in the third quarter was revised to 2.6 percent from a previous estimate of 3.0 percent, hurt by downward revisions to growth in each of the previous five quarters and by lower investment and higher imports.
Quarterly growth was confirmed at 0.7 percent between July and September, slowing slightly from the second quarter.
Britain struggled to grow in the years after the financial crisis and despite a strong recovery since early 2013, the economy is only 2.9 percent larger than its pre-crisis peak, the ONS said, a worse performance than previously thought.
Pay growth has failed to rise much, spurring households to dip into their savings.
The ONS said household disposable income, after tax and inflation, fell 0.1 percent on the quarter and was up only 1.0 percent on the year.
Nevertheless, consumers dug into their savings and household spending picked up speed, rising 0.9 percent from the April-June period and making it the main driver of growth.
Weak earnings have also put living standards at the center of campaigning for Britain’s national elections in May.
To the relief of Prime Minister David Cameron, earnings have recently shown some signs of picking up.
The ONS also said Britain’s deficit with the rest of the world via its current account rose to 27.0 billion pounds in the third quarter, equivalent to 6.0 percent of GDP, matching the biggest deficit on record.
Income from investments held abroad fell while payments to foreign investors in Britain rose, the ONS said.
Simon Wells, an economist at HSBC, said the size of the deficit did not seem to be a problem for now but underscored how much Britain relied on foreign investors to buy its debt.
“If the UK falls out of favor with international investors for any reason, the economy might be forced to rebalance the hard way, i.e. with a combination of currency depreciation to make exports more competitive and lower domestic demand to suck in fewer imports,” he said.