GDP ...still down

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As trailed by other recent data releases, the latest GDP estimate for the second quarter was revised up to a contraction of 0.5%. So the UK's economic performance wasn't quite as dire as the first cut of data suggested.

But as we said last month it's still difficult to take the figures at face value as the impact of additional bank holidays will have had a material impact on output across a number of sectors - inlcuding manufacturing. If activity has been displaced rather than lost - as was the case in previous Jubilee years - most of the ground lost in the second quarter should be made up in the third.

However, the second estimate provides a bit more detail on the components of growth and these are the areas we need to be watching closely.

Trade and investment are what's needed for rebalancing the economy. But growth across both components appears to be nowhere in sight, not just in the most recent quarter, but over much of the past year.

Th ongoing euorzone crisis and the slowdown in some emerging markets is casting a long shadow over the UK and this is being reflecting by the drag that net trade is having on economic growth. Despite hopes that net trade would be a big contributor it has had a positive impact on growth in only five quarters since the end of the recession.

And there's been a similar trend with investment. It's not yet outwith the bounds of possibility that the Office for Budget Responsbility's March forecast of a 0.7% increase in business investment could materialise in 2012. But for the private sector to chalk up an increase of nearly 6.5% next year looks challenging given recent trends.

Manufacturing does, however, seem to be bucking the investment trends. Capital expenditure across the sector rose more than 5% in the second quarter, pushing investment levels around 13% higher compared with a year ago. The strong focus on productivity, the need to replace machinery with the lastest technology and investment to support entry into new markets or supply chains are all likely to be playing a part in driving more postive investment trends across manufacturing.

So manufacturing investment is perhaps a glimmer of good news amongst data which is largely pointing underlying weaknesses across the economy. Regardless of the size of the rebound in Q3 it's clear that kick-starting the rebalancing process is going to need a fair bit more effort from policy makers.

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Chief Economist

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