Don’t panic over disastrous GDP data

 
Allister Heath
MEA culpa. The dramatic extent of yesterday’s collapse in reported GDP took me by surprise, though I realised a couple of weeks ago that the slowdown was sharper than previously thought. That the data confounded every professional forecaster polled by news agencies, as well as the Bank of England and all political parties, is only a partial excuse.

So why did the ONS say that the UK shrank by 0.5 per cent, led by construction and the snow? And crucially does this imply a double-dip recession – something I have long argued would not happen – or a largely weather-related blip? We won’t know for sure until we start getting January figures – the first indication earlier this month that there was a problem in December came from the services purchasing managers’ index, which abruptly collapsed. If the survey remains negative, we will be in trouble; if not, then the fourth quarter will turn out to be what I think it really was – a bump in the road to recovery, similar to those we always see in upturns, exacerbated by our pathetic inability to cope with snow.

Yesterday’s data was even more preliminary than usual. The ONS admitted that much of it was really guesswork. I have long thought that it would be better to wait a bit longer before providing the markets (and journalists) with absurd, incomplete figures which are always revised upwards, generally by about 0.2 percentage points. I well remember the last shock, for the fourth quarter of 2009: the consensus was for growth of 0.4 per cent – the first estimate came in at just 0.1 per cent. In the end, however, the data was revised up to 0.5 per cent. This is an almost scandalous indictment of current data release practices and proof that yesterday’s data should be taken with a bucket of salt.

Even more than the overall figures, the composition of growth is always revised drastically. When one looks at third quarter 2010 numbers in detail, one soon realises that the components have completely changed. All the early analysis produced by the City and the media turned out to be worthless. Business surveys, even for December, do not indicate anything like as much weakness in GDP as the ONS reports.

The ONS thinks that without the snow there would have been zero growth – I suspect that the end result will be to show that the underlying expansion was a little better than that. Another sign of relative strength: government revenues rose to £39.3bn in December compared to £37.8bn the previous year; clearly, despite the reversal of the VAT cut, this means the economy didn’t collapse. Yet it would be wrong to deny the existence of a slowdown: parts of the economy clearly paused for breath, probably from November, the weak employment figures suggest.

As the EEF points out, in the few years following the recession in the 1980s quarterly growth rates oscillated between -0.7 per cent and 1.5 per cent. Up until the third quarter of 2010, growth coming out of the recession was faster than in the 1980s or 1990s. GDP is now 2.2 per cent higher than it was at the end of the recession – a weaker recovery than in the 1980s but a stronger one than the 1990s. The government should stick to its austerity plans, which did not cause yesterday’s supposed slump and which are the only way to prevent a sovereign crisis. It is not (yet) time to panic or predict a new recession – but you will be the first to know if I change my mind.

allister.heath@cityam.com
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