Britain's surprising GDP

The release of Britain's third quarter GDP surprised the markets, which estimated the economy to grow by mere 0.4% compared to the actual 0.8%. Stock markets reaction seemed muted at best, but the currency markets welcomed the news with a sharp rise in the British pounds.

The result would be a boon for the country which has just launched a bold plan for substantial cut in budget deficit estimated to be above 10% of GDP. The Chancellor of the Exchequer George Osborne was delighted to declare,

What you see today, in an uncertain global economic environment, is Britain growing, growing strongly, the strongest growth we have seen in this part of the year for a decade, and also our country's credit rating being secured. That is a big vote of confidence in the UK, and a vote of confidence in the coalition government's economic policies.

In spite of the government's relief, pundits may raise some questions over the content of growth.

Several analysts are concerned about the durability of construction-led growth, which accounts for half of overall growth in the second and third quarter. Moreover, the government sector contributed one fourth of growth to the economy in the third quarter, which is in turn likely to wane along with public construction if budget cut program begins. Business services and finance contributed the most in the third quarter, but given tightening regulation over finance industry, this sector also could not be counted much in the coming years.

Standard & Poor's lifted its outlook for Britain's triple-A sovereign debt to 'stable' from 'negative' in the same day as GDP release on the notion that

The decisions reached by the United Kingdom coalition government ... reduce risks to the government's implementation of its June 2010 fiscal consolidation programme.

But at least the question over the state of Britain's economy remains unanswered, and the markets would not be fully convinced of how the massive cuts in public spending rock the economy.