UPDATE 3-Britain’s Q3 GDP beats forecasts but risks ahead

* UK Q3 GDP +0.8 pct qq vs +0.4 pct forecast, Q2 +1.2 pct

* Sterling jumps, gilts slide as QE bets recede

* S&P raises outlook on Britain’s AAA rating to stable

* Economists see big headwinds to growth in 2011

(Adds BoE’s Sentance, detail)

By Christina Fincher and David Milliken

LONDON, Oct 26 (BestGrowthStock) – Britain’s economy grew twice as
fast as expected in the third quarter and ratings agency
Standard and Poor’s lifted the threat of a credit downgrade, a
boost for a government under fire over steep spending cuts.

But the risk of a sharp slowdown in the first half of 2011
remains, with strong headwinds likely to come from tax rises, a
patchy recovery in Britain’s main trading partners and cuts
which may cost half a million jobs in the public sector.

The Office for National Statistics said Britain’s economy
grew 0.8 percent between July and September, down from a
nine-year high of 1.2 percent in the second quarter but twice
the 0.4 percent most economists had expected.

Sterling jumped and gilts hit a one-month low as investors
reckoned the combination of above-trend growth and above-target
inflation meant the Bank of England would struggle to justify an
expansion of its “quantitative easing” to support the economy.
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BREAKINGVIEWS-GDP surprise won’t remove risk of double dip

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Graphic: http://r.reuters.com/nag32q
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Speculation Britain’s central bank might pump more money
into the economy gathered pace this month after one policymaker,
Adam Posen, broke ranks to vote for additional easing. However,
Andrew Sentance, the committee’s most hawkish member, lost no
time in reiterating his belief that interest rates should now
start to rise — albeit gradually.

Economists said the data was likely to make the BoE keep
policy unchanged for longer.

“For the Bank of England, the GDP strength probably
minimises for the time being the risk of others joining Adam
Posen in voting for another round of QE,” said George Buckley at
Deutsche Bank.

GOVERNMENT PLEASED

In annual terms, Britain’s economy grew by 2.8 percent in
the third quarter, the fastest rate in three years and up from
1.7 percent in the previous quarter. The BoE had forecast growth
of around 2.4 percent in August.

Less than two hours after the data, ratings agency S&P
raised the outlook on Britain’s triple-A rating to “stable” from
“negative”, citing the government’s commitment to see through
its ambitious austerity programme.

British finance minister George Osborne described the GDP
reading and the move from S&P as “a big vote of confidence in
the UK and a vote of confidence in the coalition’s economic
policies.”

Taking both the second and third quarters together, Britain
enjoyed its strongest six-month growth spurt since the first
half of 2000.

However, this momentum is not expected to last. Cuts to
public-sector jobs and spending start in earnest next year, and
a rise in value-added tax and reductions in some benefits will
take money out of consumers’ pockets.

Tight credit from banks adds to the difficulties the private
sector will face in replacing public sector activity.

“The government will no doubt take this as a sign that the
private sector can fill the gap created by public sector cuts,
but with consumer confidence, hiring intentions surveys and
housing activity data all softening we remain cautious,” said
James Knightley, an economist at Dutch bank ING.

CONSTRUCTION BOOST TO FADE

A quarter of Britain’s third-quarter expansion was due to
construction, enjoying a second quarter of strong growth
following disruption from an unusually icy winter. Construction
output expanded by 4.0 percent on the quarter and 11.0 percent
on the year, its best annual performance since 1988.

Commentators were united, however, in expecting the boost to
be short-lived. Public works contracts have been one of the
first casualties of Britain’s austerity drive and house prices
have weakened markedly over the summer, denting housebuilders’
enthusiam for new projects.

“Looking ahead, with the cuts already set out in the
comprehensive spending review, contractors face a difficult
period ahead and optimism in the civil engineering sector is not
high for 2011,” said the Civil Engineering Contractors’
Association’s head of industry affairs, Alasdair Reisner.

Services growth held steady at 0.6 percent on the quarter
but industrial output growth slowed to 0.6 percent from 1.0
percent in the previous quarter.

The EEF, which represents manufacturers, said Britain’s
recovery appeared steadier than that after past recessions, but
that future growth could not be guaranteed.

“Below the headline number we are still only seeing
tentative signs of the economic rebalancing the UK needs,” said
EEF senior economist Jeegar Kakkad. “The rising risk of a
currency war, coupled with cautious consumers at home, could
still derail recovery.”
(Additional reporting by Lorraine Turner and Fiona Shaikh,
editing by Patrick Graham)

UPDATE 3-Britain’s Q3 GDP beats forecasts but risks ahead