When the first estimate of UK GDP in 2010 Q4 showed a fall of 0.5 per cent, I commented in this blog that this news was “too bad to be true”. The second estimate for Q4 came out this morning and, sure enough, the figures were – worse. Undaunted, I am still strongly of the view that this depressing quarter does not give an accurate reading on the true state of the UK economy at present. Most other information points to a continuation of reasonably healthy growth in recent months, and a strong bounce-back in the official GDP number is still to be expected in Q1.
The ONS certainly knows how to make the most of a single item of bad news. The preliminary estimate for GDP in Q4 triggered a storm when it showed a drop of 0.5 per cent compared to the previous quarter, but this figure was explained by bad weather (which depressed output by half a per cent), and large declines in construction and North Sea oil output.
There was no real reason to expect an upward revision when the second estimate was published this morning, since there was very little new information available to the statisticians, and that which was available (retail sales and manufacturing in December) was worse than previously known. The small downward revision was not really unexpected, and should not reinforce fears that the economy has fallen off a cliff. Instead, it simply restates information which had already been published.
It still appears that a combination of factors have come together to understate substantially the underlying rate of growth of UK GDP in Q4, by far the largest of which was the weather. It is unlikely that these weather effects will be revised away with the fullness of time, so there is no real reason to believe that further revisions to the Q4 data will necessarily be upwards. However, 2011 Q1 is likely to see a strong bounce-back in the growth rate when the first estimates are published at the end of April.
Why do I still believe this? Basically, it is because the survey information which has been published across the economy in recent months bears absolutely no relationship to the very weak official GDP data, even when weather effects have been full taken into account. This can be clearly seen, for example, from the following graph, which shows the survey results collected by Bank of England agents, compared to the quarterly annualised growth in official GDP:
The reports by the Bank’s agents are fairly typical of other surveys, such as the purchasing managers’ reports. As the graph shows, there has been little deterioration in any producing sector of the economy since last summer, according to the Bank reports, though admittedly there has been some tailing off in retail turnover (which has also been confirmed in some fairly grim consumer confidence readings since the turn of the year).
Elsewhere, the surveys have been strong enough to suggest that the underlying growth rate of GDP has been maintained at around its trend rate of about 2.5 per cent annualised in the past two quarters. In general, I would prefer to believe the preponderance of survey information on the state of the economy rather than the official GDP data when the two sources of information differ, so I am staying at the optimistic end of the spectrum on this particular debate.
All of this uncertainty about the present state of the economy is of course a major headache for the MPC. When nine intelligent people are employed to do nothing other than worry full time about the state of the economy, and then come up with four separate points of view on the appropriate setting for monetary policy, you know that something very unusual is going on.
It is clear that the disappointing GDP data for Q4 have given a few MPC members a reason for delaying an interest rate rise, even though the really big new development has been that inflation data have been uniformly worse than expected. This is especially true of the “middle” group of five members who voted for no change last month. Some of these are clearly leaning towards a rate hike in the near future, but will now want to wait for the Q1 GDP data before pulling the trigger.
Société Genéralé’s Paul Jackson says this morning that he expects the MPC to “hike in May and go away”. Not quite. They seem more likely to hike in May, and then probably hike again in July and maybe in September as well, as is currently anticipated in the forward markets.
Only if events prove that I have been far too optimistic about the underlying rate of GDP growth can rate hikes now be averted.
