s not every day that the British economy gives us cause to celebrate, so we should all make the most of yesterday’s excellent third quarter GDP growth figures. The economy bounced back by one per cent compared with the second quarter, which was very good going by any measure.
The figures need to be treated with caution, of course; these early versions are based on incomplete data and are endlessly revised. The composition of the growth – what part came from services, manufacturing, or construction – is subject to even greater change. But one thing is clear: the economy did bounce back, the double-dip recession is over and it was a good day for George Osborne and a bad one for Ed Balls.
The strong rebound confirms that the second-quarter fall was entirely due to the extra bank holiday. As Simon Ward of Henderson points out, the underlying economy contracted in only two quarters – the fourth quarter of 2011 and the first quarter of 2012. GDP fell by 0.4 per cent and 0.3 per cent in those two quarters, if the latest versions of the official statistics are to be believed, or only 0.2 per cent both times excluding oil and gas production.
The economy remains around three per cent smaller than it was at peak – but as Andrew Sentance points out on p21, non-oil GDP is down by less than overall GDP. This makes a difference: North Sea oil and the rest of the economy operate very separately; oil and gas output does of course have an impact on UK Plc but fluctuations in output have no effect on the living standards of 99.9 per cent of the public at large.
There are, of course, important caveats. The economy bounced back in July-September 2012, compared with April-June 2012, but it remains the same size as it was in July-September 2011. Stagnation is better than shrinkage, of course, but zero growth is still a very poor result. Given that the population keeps going up, GDP per capita fell slightly over the past 12 months.
The ONS warned this week that net national income per head in the second quarter had collapsed 13.2 per cent below the first quarter of 2008. Even if that decline has now been cut to 12.2 per cent – and that isn’t clear given that GDP and NNI are different measures – the collapse remains
cripplingly vast. And yesterday’s good news on output will do nothing to reduce the feel-bad factor caused by real wages that are down five per cent since 2008, house prices that are down by a third in real terms across the UK (according to Halifax), slashing the wealth of the two-thirds of households that own one (though helping those who want to buy), and the reality that sterling has lost 14 per cent of its purchasing power since the start of the crisis, according to the retail price index. Most people have been getting poorer and a slight improvement in GDP won’t be enough to reverse this living standard crisis.
The Bank of England may now pause its quantitative easing (QE) programme when it meets in November. That, at least, is the view of many in the City – I’m not yet convinced. Fourth quarter GDP is likely to be weak as is growth next year, which means the Bank may feel justified in continuing QE. Paradoxically, for George Osborne, whose budget deficit so far this year is up by four per cent, the end of QE would be a nightmare. It would force him to genuinely tap the markets for his gilts without any support from the Bank’s giant bond-buying machine. Good news on growth would turn into bad news for him on deficit financing. We shall soon find out – but my bet would still be for more QE next month.
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