We expect revised national accounts data for the third quarter (out Wednesday) to confirm that GDP growth held up well at 0.8% quarter-on-quarter in the third quarter. We suspect that the year-on-year growth rate may be trimmed to 2.7% from the currently reported rate of 2.8%.

Downward Revision to Construction Output May See Third-quarter Year-on-Year Growth Rate Trimmed: The Office for National Statistics (ONS) has recently significantly downgraded construction growth in the second quarter (from 9.6% quarter-on-quarter to 6.8% quarter-on-quarter) and also revealed that the sector contracted more than earlier reported in the first quarter. Although the ONS confirmed that the construction sector expanded 4.0% quarter-on-quarter in the third quarter— as was reported in the preliminary national accounts data— the year-on-year growth rate was cut from 11.0% to 8.6% due to the revisions to the earlier data. While the construction sector only accounts for 6.3% of total U.K. output, the extent of the downward revision in the second quarter has significant implications. It means that barring any revisions to the other components of GDP, overall growth in the second quarter would be reduced by 0.2 percentage point to 1.0% quarter-on-quarter from the currently reported 1.2% quarter-on-quarter. The current data show construction output accounting for 0.6 percentage points of the second quarter growth, but this has now been reduced to 0.4 percentage point.

Obviously, any downward revision to past GDP growth would be disappointing but the overall economic picture would not change that much. The economy still saw very decent growth in the second quarter and activity still appears to have held up pretty well in the third quarter. Indeed, there are currently no indications that the third-quarter GDP growth rate of 0.8% quarter-on-quarter will be revised down. Not only has the ONS confirmed that construction output rose 4.0% quarter-on-quarter, but it has also confirmed that industrial production expanded 0.6% quarter-on-quarter. Admittedly, the services sector is by far the largest sector (accounting for 75.8% of total output) but there are no factors that currently point to any major revisions to the ONS' initial estimate that service sector output expanded by 0.6% quarter-on-quarter in the third quarter.

The revised national accounts data for the third quarter will also contain the first breakdown of GDP on the expenditure side of the economy. Consumer spending growth was probably similar to the 0.7% quarter-on-quarter rate achieved in the second quarter. Retail sales volumes growth moderated to 0.9% quarter-on-quarter in the third quarter from 1.5% quarter-on-quarter in the second quarter, but spending on services appears to have been modestly firmer. We assume that stock rebuilding made another significant contribution to growth after adding 0.4 percentage point in the second quarter, whilebusiness investment likely expanded for a third successive quarter after being slashed in 2008/9. Government spending also probably continued to grow in the third quarter but we suspect that net trade remained modestly negative as imports rose faster than exports.

Outlook

Despite resilient GDP growth of 0.8% quarter-on-quarter in the third quarter, economic activity still seems set to be seriously pressurized over the coming months by major fiscal tightening increasingly kicking in (notably including value-added tax rising from 17.5% to 20.0% in January), persistently tight credit conditions, slower global growth and ongoing significant constraints on consumers (high unemployment, low wage growth, high debt levels, and a weak housing market in addition to being hit by the fiscal measures).

In addition, excess capacity is likely to limit the upside for business investment, although there is likely to be increasing capital expenditure by cash rich companies to upgrade or replace dated plant in order to improve efficiency. Meanwhile, stock rebuilding can only support growth for a limited time.

We project GDP growth to moderate to 0.5% quarter-on-quarter in the fourth quarter. We assume that there will be a limited boost to growth in the fourth quarter from some consumer spending being brought forward (particularly on big-ticket items) ahead of January's VAT rise. This would result in overall GDP growth of 1.8% in 2010

We expect GDP growth to slow to around 0.3% quarter-on-quarter in each of the first three quarters of 2011, before picking up gradually helped by global growth regaining upward momentum. Consequently, we see GDP growth coming in at 1.7% overall in 2011.

Our GDP growth forecasts for 2010 and 2011, therefore, match those of the OECD that were released on Thursday. They are significantly softer for 2011 than those of the Bank of England and the Office for Budget Responsibility.

CBI Distributive Trades Survey for November

The Confederation of British Industry (CBI) distributive trades survey for November (out on Thursday) is forecast to show that the balance of retailers reporting that sales were up year-on-year eased back to +33% from +36% in October and a six-year high of +49% in September.

It is likely that retail sales will benefit to a limited extent in the final weeks of this year from consumers looking to make purchases of more expensive items ahead of the January VAT increase from 17.5% to 20.0%. Retailers will also be fervently hoping that consumers decide to splash out and have a good Christmas, despite their worries and uncertainties over the economic outlook.

Further out though, the concern remains that consumers will rein in their spending in the face of serious headwinds. Consumer confidence is currently low while the substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets. Households already face high unemployment, muted earnings growth, and elevated debt levels. On top of this, the weakness of the housing market is likely to have a dampening impact on consumer spending. Furthermore, rising food and energy prices threaten to increasingly limit the ability of some consumers to make discretionary purchases.

Mortgage Approvals in October and House Prices in November

The British Bankers Association is expected to report on Tuesday that mortgage approvals for house purchases were essentially stable at 31,000 in October, compared to 31,104 in September. This would be the lowest level since March 200, and down from a peak of 45,498 last December. It would also be substantially below the average monthly level of 58,871 seen since 1997

Meanwhile, the Nationwide lender could release its house price index for November during the week. We expect this to show that house prices fell 0.5% month-on-month in November, after a drop of 0.7% in October. House prices have fallen or been flat month-on-month on the Nationwide measure every month since June. This would push the year-on-year increase in house prices down to just 0.3% in November from 1.4% in October and a peak of 10.5% in April.

While we not expect house prices to crash, we do expect them to trend down gradually to lose around 10% from their peak 2010 levels by the end of 2011. High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage, a housing supply/demand balance currently firmly in favour of buyers and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices. Low interest rates and the current stamp duty holiday for first-time buyers on all properties costing up to £250,000, only partially offset these adverse factors— especially as it is difficult for many people to get a mortgage.

Much will obviously depend on mortgage availability, the amount of houses coming on to the market, and how well the economy holds up as the fiscal squeeze increasingly kicks in.