The past week has seen the publication of disappointing Q1 GDP data for both the US and the UK. On the surface, this seems worrying, since these two economies have always been the most vulnerable to double dip recessions, because of their exposure to housing and their bloated financial sectors. In both economies, the slowing GDP figures have led to calls for further fiscal or monetary stimulus. However, the official GDP statistics are probably exaggerating the extent to which the economies have in fact slowed down since the beginning of 2011.
As this blog argued last week, the official expenditure data which have been published in the US so far this year have been much weaker than the business survey data, manufacturing output figures, and labour market statistics. 
In the event, the real GDP growth rate in Q1 dropped to 1.8 per cent annualised, down from 3.1 per cent in the previous quarter. However, much of this decline in growth was explained by the extreme weakness of two sectors: government expenditure (-5.2 per cent) and private non-residential construction (-21.8 per cent). Without the negative impact from these two sectors, both of which were depressed for exceptional reasons, the GDP growth rate would have been around 3.3 per cent, little changed from the recent run rate.
Furthermore, as the accompanying graphs show, there has been no real sign of any significant slowdown in business survey data in the US. 
What seems to have happened in Q1 is that the damage to growth which would have occurred as a result of higher oil prices has been almost entirely offset by the cut in the payroll tax rate which occurred in January, thus helping final expenditure in the household and corporate sector to continue expanding at fairly healthy rates during the quarter. Without the cut in payroll taxes, the underlying behaviour of the economy would have been much weaker.
What about the UK? The rise of 0.5 per cent in real GDP in Q1 (2.0 per cent annualised) exactly offset the drop which had occurred in Q2, so the two-quarter growth rate has now declined to zero. However, it seems unlikely that this represents a true reflection of the underlying growth rate in the economy at present.
Apart from weather effects (which cancel out over the two quarters), construction, oil and utilities all fell sharply in Q1, which depressed the growth rate by about 1.2 per cent annualised. Much more importantly, however, the weakness in the official GDP data has not been confirmed by any decline in business survey data, or by any signs of renewed trouble in the UK labour market. Although the media tend to assume that early versions of the official GDP statistics are more reliable indicators of underlying economic growth than other sources of information, this is highly questionable in the case of the UK.
According to Kevin Daly at Goldman Sachs, this tends to be especially the case during and immediately after recessions. Of the 31 occasions since 1975 when the initial estimate of GDP was negative, the average upward revision was as much as 4 per cent at an annual rate. And in the two years following the trough of a recession, the average upward revision was less than this, but still amounted to 1 per cent at an annual rate. In other words, it is quite likely that UK real GDP growth in the past two quarters will be revised up markedly from the zero rate which is currently estimated.
According to Daly, four separate sources of business survey data indicate that the growth rate has been running at or a little above trend, despite the combined effect of higher oil prices, and the onset of a fiscal tightening equivalent to 2 per cent of GDP per annum since April 2010. If this is right, it would suggest that net exports and corporate investment have been responding to zero interest rates and a super-competitive currency, and that these stimulative effects have been able to offset some or all of the impact of the weakening in consumers’ expenditure, which has clearly become a major drag on the growth rate.
Overall, while I readily concede that the official Q1 GDP figures in the US and the UK have been far weaker than I expected a few weeks ago, my best guess is that they have exaggerated the extent to which these two economies have really slowed down – so far. As to the immediate future, much will depend on the course of the oil price. If it continues to rise at recent rates, the depressive effects on consumers’ expenditure could easily prove too much for these, and many other, economies to bear. But it hasn’t happened yet.
