Why one bad quarter doesn't mean disaster

Here we go again. After four quarters of stronger-than-expected growth, during which the economy grew by a robust 2.6 percent, activity apparently dipped back into negative territory in the last three months of 2010. This, coupled with another bad inflation number, led to speculation about a double dip and stoked fears of stagflation in the opening weeks of 2011. In response, there were calls for the government to ease its programme of spending cuts from some, to raise interest rates from others, while another group wanted more quantitative easing.

As the cliché goes, one swallow does not make a summer, and so the pessimism that followed the GDP and consumer prices index (CPI) figures is an over-reaction. It is, for example, far from certain that the economy shrank by 0.5 percent in Q4. This was only the first estimate based on a relatively small sample, particularly for December. There are two more estimates to come in February and March based on more information, and revisions are the norm. Secondly, the Office for National Statistics thought that the worst December weather for 10 years had knocked 0.5 percent off growth – which would mean that the underlying performance was at least flat.

More importantly, the negative growth number ran counter to other information on the economy in the final months of last year. Tax receipts, employment data, business surveys and the take-up of new office space all pointed in an upward direction. The independent and respected National Institute had pencilled in positive growth of 0.5 percent for the quarter, and it would be remarkable if it was so far out. This preliminary estimate may well prove to be a rogue number: another instance of the official statisticians having more trouble forecasting the past than the future.