The US economy saw its first growth in over a year, rising to an annual rate of 3.5% between July and September.

Experts believe that a major spending plan by the US government which featured a scrappage scheme to encourage the car sales market has been the main cause of the upturn.

Some economists believe that there could be more setbacks lurking ahead, despite the official statistics showing that the recession is over.

A spokesman at the White House announced that recent economic progression was “a welcome milestone” but it would take more time for a full recovery to be recognised.

The US economy had risen 0.9% in relation to the previous three months, whereas the UK economy remained in recession, unexpectedly dropping 0.4%.

Hugh Pym, the chief economics correspondent for the BBC, revealed that the growth rate of 3.5% was greater than the 3.3% predicted by most experts.

He continued:”The sheer scale of the stimulus in the US has made a big difference, it was much bigger in percentage terms than that in the UK.”

“That the US, the powerhouse of the world economy is growing once again, is good news for the global economy has a whole.”

The last time the US economy grew was in the second quarter of 2008, by an annual rate of 2,4%.

The National Bureau of Economic Research will reveal the full extent of the US economic climb from recession when it analyses all the factors.

Some factors were significantly responsible for helping US economy during the third quarter, according to the Commerce Department.

The spending on durable manufactured products rocketed up at an annual rate of 22.3% which was the highest quarterly figure since 2001 and was spearheaded by the ‘Cash for Clunkers’ scheme helping new car sales.

Consumer spending increased on housing products by 23.4%, the greatest quarterly surge in 23 years, and came as a result of an improving housing market.

The big increase is considered by many to be due to the government’s $8,000 tax credit provided to first-time house buyers.

Government spending increased by 7.9% as stimulus spending spread and exports saw their biggest rise since 1996, rising by 21.4%.

Brian Bethune, an economist for HIS Global Insight stated that “it’s good to have the economy growing again.”

“But we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus.”

“The challenge here is to get organic growth - growth that isn’t helped by fiscal steroids.”

However, unemployment is at a rate of 9.8% and a sharp fall came in September in the car sales industry as a result of the popular car scrappage scheme coming to an end in August.

Dean Baker, co-director of the Centre of Economic Policy Research believes that “you can say that the recession is over, but it sure won’t feel like that.”

“There is a lot of downward momentum that isn’t going to go.”

According to official figures, the UK experienced an unexpected contraction of 0.4% for the third quarter, showing that the UK is still stuck in the recession.

This quarterly contraction is the sixth consecutive contraction, the worst run of figures that UK gross domestic product (GDP) has experienced since records began 54 years ago.

The GDP of a country represents the value of goods and services produced by a country. The figures released may be altered at a later date, as this is just a first estimate.

The Office for National Statistics (ONS), had been expected to show quarterly growth of 0.2%. However, no growth in retail sales for September and a 2.5% fall in industrial output for August had dented people’s positive expectations.

Experts have revealed that one of the main causes of the contraction was an unexpected drop in the services sector, with distribution, catering and hotels generating some of the worst figures.

Nearby countries France and Germany exited the recession earlier this year, and it is generally considered that the UK’s reliance upon the services sector, and more specifically, the finances sector being the main reason.

The UK economy has now experienced a 5.9% contraction since its high point prior to the recession.

The Bank of England is set to re-think its quantitative easing plan after seeing such a poor result in GDP figures. Quantitative easing involves the Bank of England printing money to buy bonds from companies and banks in an effort to encourage positive activity in the economy.

HSBC’s Bronwyn Curtis spoke with the BBC, revealing that “back in August we had a worse-than-expected second-quarter GDP number and that is the reason that the Bank of England extended the quantitative easing programme,”

ING’s James Knightly felt that the data was “awful with no positive news” and “clearly suggests that the likelihood of an expansion in quantitative easing by £50bn or so over the next quarter is rising, although [it] is not a foregone conclusion.”

It is considered by many experts to be disturbing that measures taken by the government and the Bank of England have failed to make a positive impact. However, David Kern, the chief economist with the British Chamers of Commerce believes that “continued intervention - including help for businesses to access finance, and incentives to promote investment - is still needed.”

“Above all else, business confidence must be nurtured, to ensure that recovery is not further delayed.”

Alistair Darling has announced that the government must borrow its way to recovery and believes that it’s the best avenue for the UK economy in the long run.

The Chancellor of the Exchequer confessed that further national borrowing “may feel counter-intuitive,” but “will mean the bills we face as a country are lower” in the long run.

However, many believe that the levels of government debt are already too high, with cuts in public spending and tax rises required. The government has already raised borrowing during the recession by high amounts.

Following Mr Darling’s speech, a question-and-answer session was held, with the chancellor finding agreement with Mervyn King, the Bank of England Governor, stating that there were “no simple answers” when it came to the reform of big banks.

According to Mervyn King, their core business may need to be divided into other practices to prevent them from becoming so big that they aren’t allowed to fail.

Mr Darling was concerned that “we cannot have a regulatory regime that excludes the possibility of failure.”

He went on to state that the banking sector needed more competition, and when the government came to selling its bank stakes that were bought during the financial crisis, it would be hoping to develop greater competition.

Many are calling for a reduction to the borrowing and spending that has caused so much debt, but Mr Darling believes that withdrawing government support would be “wrong and dangerous,” and the country would have to make a big decision.

At a speech in London, Mr Darling declared that “we can resign ourselves to a decade of austerity, low growth and low employment, or we can embrace change, turn it to our advantage and seize the huge opportunities a global recovery will bring.”

He continued by warning that withdrawing government support to the economy “would put the recovery at risk and abandon people facing unemployment.”

In a bid to encourage demand during the recession, the government has pushed billions of pounds into the economy through its £175bn quantitative easing plan, cut the VAT rate and helping ailing banks.

According to Mr Darling, a great deal of work was still required to steer the country out of the recession, including three big steps.

“First, we must support the economy until we’re sure the recession is over. Some are tempted to think the crisis is over. It’s not. Banks all over the world are still dependent on government support.”

The second step would involve raising taxes to regain financial strength and taking “tough choices on public spending for the years ahead”.

He added, that it “will mean cutting costs, cutting waste and cutting lower priority budgets, while continuing to invest in our priorities and our future.”

His third step would involve a government plan of growth.

“We need growth, because when we grow, the economy becomes bigger, we all become richer as a country, and it gets easier to pay back debt.”

Whilst the general financial atmosphere is improving and optimism growing, it is too soon to announce that we are in the process of recovery, according to experts at Ernst and Young Item Club.

The influential professional services firm expects some growth towards the end of 2009, but this growth should begin to struggle, with 1% expected growth for 2010.

They also predicted that customers repaying debt will grow slower than first anticipated and impending tax rises will follow the election.

BT Business research predicted a more optimistic outlook, declaring that small businesses are positive about the forthcoming year.

In September, BT Business conducted a survey of over 7000 small businesses and found that 75% believed their business would see an upturn in 2010, with 61% confident about their business’ prospects.

Professor Peter Spencer, Chief Economist from the Item Club, issued a wake-up-call to all those getting carried away with the optimism of recovery.

He warned, “there could still be substantial pain to come for corporates and consumers.”

“For a sustainable recovery the UK economy needs world trade to pick up and there is still not much sign of that happening.”

One of the factors holding back growth is that the VAT rate will return to 17.5% from its current level of 15% on 1 January, a change which may see consumers making purchases before the New Year.

Several other factors which will hold back growth lie on the horizon. An increase in national insurance contributions, the new 50p tax rate, the termination of the car scrappage scheme, tighter government spending and the return of stamp duty on housing are all due to hit the country.

Judging whether the recovery is happening, on the way or unlikely is difficult to forcast.

Professor Spencer went on to tell the BBC that the recent economic data has been “very mixed,” adding, “the stock market is absolutely rampant, industrial surveys all back in positive territory, but it’s yet to show through in hard data for output and things like that.”

“And when it comes to lagging indicators like unemployment, I’m afraid it’s going to be ‘feel bad’ for quite some time to come.”

On Friday, the official statistics for the Gross Domestic Product (GDP) are released, with many expecting no economic growth at all.

GDP is a measurement of the services and goods produced in a country, and since the first quarter of 2008, the UK GDP has been in negative figures.

The Bank of England has focused on quantitative easing, an act of pushing money into the economy. Professor Spencer feels that this has been of little success, with the little improvement on bank lending, going on to complain that “instead, the banks appear to have used much of the money to rebuild reserves and improve liquidity.”

Official statistics show that one of the main measures of inflation has reached its lowest point since September 2004, another sign of sterling weakening. The annual rate of 1.1% in September was lowered from 1.6% in August by the Consumer Prices Index (CPI).

A separate measure of inflation conducted by the Retail Prices Index (RPI) found that mortgage interest payments and housing costs also dropped, from -1.3% to -1.4%.

The pound also reached its lowest point in the past six months when it fell 0.5% against the Euro to 1.0628 Euros and to a five-month low of 1.5730 US Dollars.

Weak

Duncan Higgins, a senior analyst for Caxton FX, felt that “this is bad news for the pound.”

“The CPI figures will weigh heavily on the UK currency and will continue to discourage investment.”

A report conducted by the Centre for Economics and Business research predicted UK interest rates would not rise above 0.5% until 2011 and fail to meet the 2% mark until 2014; a further damnation to the outlook for the pound.

Meanwhile, the strength of the UK economy was dealt a further blow last week when it was revealed that industrial output dropped in August.

A prediction for the GDP had to be recalculated by the National Institute of Economic and Social Research after the UK economy failed to grow during the June/September quarter.

However, the economy is still very “frail” according to the British Chamber of Commerce (BCC), despite business confidence improving.

In an effort to sustain a stable broader economy and prices, the Bank of England is making efforts to retain 2% CPI inflation. Should the CPI inflation drop below 1%, the governor of the Bank of England must provide a written explanation to the Chancellor, Alistair Darling.

High energy prices a year ago, in comparison to lower energy prices this September are being blamed for the recent fall in inflation. The Office for National Statistics (ONS) reported that electricity, gas, and other fuel bills tumbled by 7.3%. Energy costs have started to level more recently, with little change from August to September.

Jonathan Loynes from Capital Economics predicted that we can expect to see CPI back at the 2% mark by the start of 2010, due to increased energy prices and VAT returning to 17.5%. He does believe that a “huge amount” of unused production capabilities would keep inflation down and “keep alive the threat of a period of outright deflation late next year or beyond.”

In contrast, Keith Wade of Schroders UK forecasted that it “probably will be the low point in inflation.”

After years of deflation when it comes to food prices, research from Verdict Consulting has shown that 2008 saw a sharp increase in food prices.

According to the research, for the period of 12 months up to the end of December 2008, food price inflation hit 11.9%. It also showed that the monthly increase from November reached 1.4%.

The Verdict has said that: “the good news for consumers is that the pace of food inflation is easing.”

This news came on the cusp of research that was expected to show that inflation eased considerably in December.

A Reuters poll has tipped that the annual inflation rate will have fallen to 2.7% in December, from 4.1% in November.

Consulting director for the Verdict, Neil Saunders has said: “consumers have felt the pinch of rising food prices and have reacted by shopping around more, using discount supermarkets and buying less.”

The Verdict has also said that people are becoming more sensitive and “increasingly willing to sacrifice convenience for low prices.”

This is shown by the fact that, on average, in 2007, people shopped at 1.9 other stores on top of their main store, while in 2008, this rose to 2.4 additional stores on top of their normal retailer.

Also, it has been recorded that laundry, washing and paper product sales were up 21.6%, while meat and fish sales increased 17.7%, and fresh fruit and vegetable sales rose by 16.8%.

The major concern for the first half of 2008 was the continuing rapid inflation, but it seems that worry has now been reversed to worries about deflation as the economy slows down and consumers cut how much they spend.

The Consumer Price Index (CPI) is tipped to stay above the UK’s target on 2% inflation, but is expected to be far from last September’s high of 5.2%.

At the same time, the Retail Price Index (RPI) is expected to fall to an annual rate of just 0.8% in December, from 3% in November. This figure includes mortgage payments.

In an attempt to boost the economy, the Bank of England reduced its interest rates to 1.5% earlier this month, its lowest level in the Bank’s long 315 year history. Despite this, many economists are predicting that the economic slowdown will continue for some time yet. As credit remains difficult to access and manufacturing slows and the number of unemployed increases.

After a 16 year high, UK inflation fell in October, as oil and transport costs, as well as fuel prices, fell.

The Consumer Price Index (CPI), which was at 5.2% in September, has fallen to 4.5% in a month. According to the Office for National Statistics (ONS), this is the biggest month-on-month drop in 16 years.

The Retail Prices Index (RPI) also fell from 5% to 4.2%, its biggest fall since 2003. This index includes house prices, and is often used for agreeing pay settlements, or calculating the up rating of benefits like pensions.

Core inflation, which includes the likes of food, tobacco and alcohol, fell from 2.2% in September, to 1.9% last month.

The ONS has said: “The largest downward pressure on the CPI annual rate came from transport costs where the price of fuels and lubricants fell this year but rose last year… The decrease this year was triggered by a sharp fall in the price of crude oil.”

Other things that may have contributed to the decrease are the fall in prices of both air and sea transport, and from food and non-alcoholic drinks, as the prices of meat were cut in the supermarkets.

The UK economy shrank for the first time since 1992 this year, falling by 0.5% in the third quarter of 2008.

The Bank of England has said inflation could fall below its target of 2% next year, and could even drop as low as 1%.

All of this led to the Bank of England lowering its key Bank Rate in October to just 3% - its lowest level since 1955.

Chief economist at the British Chambers of Commerce, David Kern, said: “Following these [inflation] figures, it is clear that UK interest rates will be cut further, most likely to 2% in early 2009.
“One cannot rule out rate cuts below 2% later next year.”

The slowing UK economy is also pulling down cost-of-living prices, due to falling food and fuel prices. The fact that crude oil is remaining at under $60 a barrel is primarily responsible for decreased fuel prices.

Senior economic advisor to Earnest & Young ITEM Club, Hetal Mehta, has said: “With commodity prices falling and the economy shrinking fast, inflation is going to undershoot the 2% target by the middle of next year.
And while it is still unlikely on the CPI measure, the prospect of deflation cannot be ruled out.”

Figures from the ONS also show that output prices (the prices of food leaving the factory) dropped by 1% in October.

Input prices, on the other hand, (the cost of the raw materials bought by the manufacturer) dropped by 5.6% in October, the biggest drop in 12 years.

The Governor of the Bank of England, has admitted that it’s very likely that the RPI will reach negative percentages next year.

The Bank is also expected to drop its interest rates to 2% in December, its lowest level since the 1930s.

Although a short period of deflation would not be too bad, a prolonged period could be disastrous, as consumers hold off buying goods thinking they will be cheaper later. This can lead to firms selling less and wages being cut, and overall, less money to spend meaning demand falls even further.

Almost 200,000 council workers in Scotland are staging a 24-hour walkout over a pay dispute, causing disruptions to local services such as schools, rubbish collection and ferry crossings. The council workers - members of the GMB, Unite and Unison unions – are due to take part in the strike after they rejected a 2.5 percent deal over the next three years.

Local government group Cosla, said that councils could not afford to increase the pay offer. Scottish ministers have urged both sides to resolve the dispute.

Industrial action will take place across the country; however the level of disruption differs in council areas. Many schools, libraries and day care centres will be closed, along with disruptions to school buses, school dinners and meals on wheels vans.

Caledonian MacBrayne, the ferry operator, said it would cancel sailings from Rothesay and Dunoon piers, due to action by Argyll and Bute council workers.

David Prentis, general secretary of Unison, which represents around 100,000 workers, said he hopes the public would understand the concerns.

He said: “Our members are taking this action very reluctantly. They care deeply about the vital services they provide and those who depend on them and we apologise for any disruption.

“However, members feel they have no choice when the employers’ offer is effectively a pay cut.”

Council headquarters will be picketed, and Union members will also distribute leaflets to commuters at Edinburgh’s Waverley Station, along with a rally that is due to start at 12.15 BST today (20/08/08) in Glasgow’s George Square.

Michael Cook, Cosla spokesman for the Scottish Employers, said councils were disappointed by the strike action, and had attempted to minimise disruption.

He said: “The issues are difficult and complex and need to be carefully thought through.

“However, as soon as possible, we will arrange talks with the trade unions in a bid to reach a settlement which takes account of the soaring cost of living which affects councils just as much as our workers.”

Finance Secretary John Swinney, said: “I would encourage both parties to try to resolve the dispute to ensure that there is no further interruption to public services and I hope that resolution can be achieved by local authorities and their employees.”

Mr Swinney’s comments came after unions last week called on the Scottish government to intervene and provide “adequate funding” to local authority employers to address low pay.

A second strike by government civil servants with the Public and Commercial Services (PCS) union was also due to take place on the same day, following a similar strike last month.

The dispute revolves around a 2 percent pay increase, which its members say amounts to a pay cut while inflation rises above 5 percent.

Inflation reached 4.4 percent in July – the highest since the early 1990s and more than double the government’s target – as economists predict a further rise to 5 percent in the autumn. Rises in food prices, fuel costs and disappointing price cuts in the summer sales, have caused this latest jump, which marks the fourth monthly increase in the consumer price index.

In the Bank of England’s last quarterly forecast in May, it gave less than 10 percent probability that inflation would be as high as it is now. The bank will set out its latest forecasts for the economy and inflation on Wednesday.

Several economists expect that the Bank might even be forced to raise rates to bolster its diminishing reputation for keeping to close to target. Very few economists expect rate cuts this year.

The Bank’s forecasts on Wednesday will show that, apart from two brief interludes, it expects inflation to be too high for the five-year stretch between the summers of 2005 and 2010. High inflation in July was also feed further rises next January when regulated train fairs raise by at least 6 percent, 1 percent more than the 5 percent rise in the retail prices index last month.

Economists say the figures were shocking because they were worse than those in other countries, and were not limited to food and petrol price rises and did not yet include announced rises in gas and electricity prices. Relief will come, however, from falling oil and grain prices in the coming months, but this will take quite some time to work into lower consumer price inflation.

Vincent Cable, the Liberal Democrat Treasury spokesman, said: “It’s very clear that we’re in for a dose of stagflation, with the economy slowing abruptly and inflation too high and increasing.”

Thanks to rising inflation, many private sector companies are being forced to settle pay deals at levels that threaten the government’s inflation targets, because of clauses in long-term pay deals.

Only last week Shell tanker drivers agreed to a 14 percent two-year settlement with managers, which has prompted fears this would set a precedent for other workers and calls for restraint from ministers.

Research group IDS Pay Databank’s analysis shows many other companies which previously negotiated two or three-year pay deals – at a time when inflation was expected to stay low for years – are having to give their workers a wage “kicker”.

This is because a large portion of such deals are linked to the Retail Price Index, which has risen sharply in recent months to 4.3 percent.

Such agreements are set to undermine the Alistair Darling’s pleading. Speaking to the BBC on Sunday, the chancellor said that “Pay awards in both the public and private sectors have got to be consistent with our inflation target of 2 per cent.”

Mr Darling and John Hutton, the business secretary, argued last week that the tanker driver’s settlement was a one off. However, other recent deals include Drax Power, who agreed a 7 percent pay rise for 60 workers, forming the second of a two-year deal. Babcock Engineering recently agreed a 7.6 percent increase with 50 workers.

Barclays Bank has implemented a 5 percent pay increase for 55,000 workers, as the first stage of a three-year RPI-linked deal.

These deals are much higher than the 3.3 percent Consumer Price Index measure of inflation. The government has tried to keep public sector deals at about 2 percent.

David Frost, president of the British Chambers of Commerce, described the trend as a self-fulfilling scenario which would fuel inflation further.

IDS has indicated the highest pay awards in three months to April – the last month for which accurate figures exist – were made to companies in energy and water, chemicals and engineering. One in five deals over 4 percent were lined to RPI.

Lois Wiggins, a researcher at IDS said: “The main reason they are now settling so high is because many are part of long-term deals, which means that in the second or third stage of these deals RPI is being used to work out the settlement.”

The most recent report by the research group, which showed wage inflation of 3.8 percent, suggested employers had been “wrong-footed” by predictions inflation would remain subdued.

This will add further pressure on the government as it seeks to keep a hold on wage inflation. Several unions have openly defied this policy in recent days, with Unison threatening to re-open a key NHS agreement for 500,000 employees.