Economic crisis isn't over yet. This may not even be the beginning of the end Statistically, the UK is out of recession – but it took an Olympian effort to achieve even this fragile upturn

The economy emerged from recession – but not from crisis – thanks to several one-off factors such as the Olympics and Paralympics. Photograph: Michael Steele/Getty Images

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This is not the end. It is not even the beginning of the end but it is, perhaps, the end of the beginning. It was with those words, delivered almost 70 years ago to the day, that Winston Churchill greeted news of Montgomery's victory at El Alamein, a turning point in the second world war.

The Conservative party can never get too much of Churchill, so there will be many in the blue half of the coalition who will be hoping that the words are as appropriate for describing the state of the economy today as they were for outlining the global balance of power in late 1942.

Make no mistake, news that Britain's economy grew by 1% in the third quarter of 2012 does not mark the end of the downturn that began more than five years ago, even though it is tremendous morale booster for a government that has had its back to the wall in recent months.

The Treasury and the Bank of England know the performance of the economy was flattered by one-off factors in the period between July and September, resulting in growth figures that are less good than they look. Over the past 12 months, national output has been flat and remains 3% lower than it was in early 2008. Recovery has been weaker and slower than in any cycle for which reliable records exist, including the Great Depression of the 1930s.

It will take another year of robust growth simply to return the economy to where it was during the period of phoney war between the run on Northern Rock in September 2007 and the collapse of Lehman Brothers a year later, and a decade to make up even half the output lost over the past four and a half years. The level of gross domestic product is 13-14% below where it would have been had growth continued at its pre-recession trend of 2.5% a year. Some of that has been lost for good: it will never be recovered.

Nor is any minister, least of all George Osborne, willing to say that this is the beginning of the end. There are simply too many things that could wrong – at home and abroad – to make that boast with confidence. Not only did the announcement by Ford that it was closing two UK plantstake the shine off the GDP announcement, it also underscored the fragility of the productive wing of the economy.

Ford's decision chimes with recent business surveys, most of which offered warning signs about a fresh period of weakness in the final three months of 2012. The year started on a weak note, with consumers hammered by high inflation and exports hit by the deepening crisis in the eurozone.

In the second quarter, the economy was broadly flat but looked worse than it actually was due to the extra bank holiday granted for the Queen's diamond jubilee. That accounted for all of the 0.4% drop in GDP, and perhaps a little more.

Similarly, the third quarter figures released yesterday overstate the strength of the economy, in part because output lost in June was made up in the next two months and in part because there was a boost to growth from the Olympics. The Office for National Statistics estimates that one-fifth of the growth in the last quarter was the result of ticket sales for the Games, but the GDP data also shows an Olympic effect in very strong performance by shops, hotels and restaurants.

Overall, output of the service sector – which accounts for 80% of the economy – expanded by 1.3% in the third quarter and is now above its pre-recession peak. That is an impressive performance but is unlikely to be repeated soon. As Danny Gabay of Fathom Consulting pointed out, the increase in service sector output during the third quarter of 2012 alone was greater than in the entire period between the Beijing Olympics of 2008 and the second quarter of this year.

Wisely, Osborne was careful not to claim the third quarter growth figures as a turning point. The economy remains fundamentally weak, particularly when it comes to exports and investment, the sectors vital for the rebalancing sought by the government. More demand will be sucked out of the economy in 2013 and 2014 than in 2012 as the chancellor's fiscal tightening intensifies. This will be against the backdrop of a global economy in which there is a deepening recession in the eurozone, slowing growth in China and uncertainty about what will happen to the US economy after the presidential election. As things stand, America will wake up on January 1 next year to tax increases and spending cuts worth 4% of GDP, enough to plunge the entire global economy back into recession.

Why, then, might this be the end of the beginning? First, there was some genuine growth in the third quarter, even if it was much less than the headline figure suggested. Consumer spending is gently rising, encouraged by falling inflation, compensation payments by banks for mis-sold payment protection insurance and, notwithstanding the Ford job losses, a diminishing threat of unemployment. For the past four years, the Bank of England has been trying to get the economy moving, through record low interest rates, £375bn of quantitative easing and, more recently its Funding for Lending Scheme. It may be starting to work.

There are two other reasons for ministers to be cautiously optimistic. Recessions, even the deep and damaging ones that result from financial crises, don't last for ever. At least, none have until now.

Second, the international outlook may be about to improve. America is unlikely to leap off the "fiscal cliff" whoever wins next month's election; China's economy appears to be stabilising and there are signs Europe is getting to grips with its problems. Better global news coupled with a pick-up in consumer spending at home may be enough to persuade businesses to take some of their investment projects out of mothballs, providing a second leg to the recovery.

Ministers are not banking on any of this. Even in the absence of bad news from the global economy, there is a risk the economy will continue to bump along the bottom. Strong growth in the UK is normally associated with periods when real (inflation adjusted) incomes are rising strongly, and for now prices are still rising faster than wages - albeit by less than they were a year ago. The banking system remains impaired and the housing market will remain in the doldrums until first-time buyers can secure mortgages.

This looks the most likely scenario. There is, of course, another possibility: a fresh downturn that would push the UK into an unprecedented triple dip recession. For that to happen, something would have to go seriously wrong over the coming months. Worryingly for ministers, the history of this recession suggests that if something can go wrong, it will.

House & House

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