By any account, the third quarter contraction of 0.4 per cent is bad, very bad. Britain’s recession is now the longest since demobilisation after the Second World War. The 1980s recession was marginally deeper. Compared with the return to growth in the second quarter in Japan, Germany and France, and the expectations of a strong US third quarter, the UK appears to be the G7 laggard.

This will put the cat among the pigeons at the Bank of England. In its August forecast it expected growth of 0.1 per cent in the third quarter. A deeper recession will bolster the case for more quantitative easing as it did at the August meeting because the starting point for the forecasts is worse, suggesting more output and less inflationary pressure over the Bank’s three-year forecasting horizon.

A 1 per cent quarterly decline in the distribution sector (particularly in the output of distribution industries, hotels and restaurants) was the largest contributor to falling gross domestic product, with smaller contributions also coming from oil and gas extraction and construction. Manufacturing and services were broadly stable over the quarter.

Bad though the figures certainly are, they are also difficult to understand. Business surveys have been broadly flat or positive over the third quarter and the published hard data (industrial production and the index of services) also pointed broadly towards stagnation and not another large decline.

So these figures might well be revised higher. How much higher? That is hard to say, but bizarrely we might get an idea when we get the initial estimate of eurozone GDP. As Kevin Daly of Goldman Sachs pointed out this week, the initial published data in the eurozone is a better predictor of the ultimate UK figure than the UK estimate. This should not be true, but it is.

UPDATE 11.00

Economists and policy makers are scratching their heads about the GDP figures and do not really believe them. Some are quite sanguine:

Michael Saunders of Citi says:

“Previous GDP figures have tended to be revised up more than down and the same may well apply here. “

Others are less so. Ben Broadbent and Kevin Daly say the figure is “baloney” and question the value of publishing data which has provided little information on the final quarterly figure.

“Do today’s data tell us anything about what is really going on in the economy? Probably not.”

The Bank of England has previously been very sniffy about this data and the results of its “data uncertainty” project a few years ago led it to produce a backcast of the official data (a forecast of how much the data would be revised higher based on survey evidence). Recently, the Bank has not highlighted the data errors quite as much.

The Treasury is quite bemused this morning. Officials are pleased they did not predict the recession would end in the third quarter and are eagerly waiting for revisions. This means the pre-Budget report is almost certain to take place after 25 November, when the first set of revisions are published.

Tags: bank of england, recession, recovery, UK economy

October 23, 2009 10:08am in UK, bank of england, recession, stimulus | Comment