REPORTS ON the global and domestic economies have been so bleak lately that good news is now defined as news that is not as bad as had been expected. Recent developments in Europe, the US and even China have all made markets wobble, while inflation, jobs and the squeeze on consumers have raised the possibility of the UK sliding back into recession. This was ratcheted up a notch at the beginning of September, when the Purchasing Managers Index (PMI) survey of services for August was weaker than expected.
The key number for the UK economy is gross domestic product. In Q2, the quarterly increase was a disappointing 0.2%, down from 0.5% in Q1. This is much weaker than at comparable points (two years) after previous recessions. The statisticians did, however, highlight some special factors that would otherwise have taken the rate up to 0.7%, some of them very unusual. Especially odd is the statistical convention of including the £300m spent on Olympic tickets when the Olympics are held next year, rather than when the money was spent.
Nevertheless, 0.2% was not very robust growth. If the GDP figure is disaggregated by industry, a clearer picture emerges. Of the three key sectors, output in the production industries fell in Q2, construction was broadly flat and services grew by 0.5%. And given that services account for 75.8% of GDP, it was enough to lift growth to 0.2%. Because the deteriorating international outlook will block off the export escape route, especially for manufacturing, and construction is becalmed, the recovery will largely depend on the services sector.
Official government statistics have come in for a lot of criticism over the past few years, and analysts and policymakers have turned to surveys as guides to the short-term outlook. Because they do not ask for hard numbers, they are timelier and forward-looking.
Several trade bodies, such as the CBI’s Industrial Trends Survey, have long-established enquiries. A rather newer kid on the block, which is now much watched, is the monthly PMI, which covers services, manufacturing and construction in all key economies. For services, there are seven questions asked each time, including an overall result on business activity, and the results are presented as a number. The key figure is 50. Any response above implies expansion but below is contraction.
In August, the Services Business Activity Indicator fell to 51.1 from 55.4 the previous month, only just above the 50 threshold. The survey does not include retailing or the public sector, both of which are contracting. So it is easy to understand how, if the biggest and most buoyant sector of the economy is slowing so quickly, another bad services number could push GDP into negative territory.
But this may well be too alarmist because the detail of the survey implies there may be one-off factors at play. The PMI’s New Business Index fell by less than half the overall indicator, and there was also a slightly less negative result for business expectations. The fact that current business has slowed so sharply suggests the London riots may have accounted for a significant proportion of the decline in the PMI.
The welter of weak data cannot be brushed aside easily and recovery is obviously very fragile. But several factors (such as the coming fall in inflation, the rate of job creation in the private sector, the falling costs of government borrowing, bank rate staying at 0.5% throughout 2012) will combine to keep growth slow (1.1% in 2011) but still positive and improving. The uncertain recovery reflects the depth of the recession and the time needed to unwind the legacy issues, especially debt. Although there is some way still to go, the adjustment process is underway. ?
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