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GDP growth: The revisionists

THERE WAS a nasty surprise for the policymakers and many analysts when the Office for National Statistics (ONS) reported that the economy had shrunk by 0.2% in the first three months of this year. Coming on the heels of a 0.3% dip in activity in the final quarter of 2011, this second successive quarter of negative growth meant the UK was technically back in recession. The news raised several important questions. The first and most obvious is whether the latest number is right. The second, if it is correct and the economy is again in recession, is whether it is a double dip (ie. a continuation of the 2008-09 downturn or the start of a new one). And, finally, what does it suggest about the outlook for the rest of this year and the next?

The authorities will be hoping the second and third estimates of GDP for the first quarter are revised upwards and this nervousness about recession will have been false alarm – although the damage has already been done in market terms – when the numbers are published over the next few weeks, based on a much larger sample. It would not be the first time that the statisticians will have had to re-write history, sometimes years later. In fact, their track record over the last few years has even led to criticism from the governor of the Bank of England. The ONS tries to strike a balance between timeliness and accuracy, but it has been forced to make frequent revisions in its effort to provide up-to-date information.

This is not just wishful thinking: the 0.2% fall in GDP was at odds with other data for the January-March period, such as the PMI surveys, movements in the labour market and even consumer spending figures. Most forecasters were predicting a small increase.

While the double-dippers may feel that they have won the intellectual argument about the nature of the recession, the current situation stops well short of a return to the depths of 2009. In that one calendar year, output fell by 5%, making it the worst 12 months since the 1930s. The present hiatus in growth is a blip in comparison and attributable largely to some dubious construction figures.

But even if this is not a full-blown recession, the trading climate is clearly a very difficult one and still some way short of business as usual. And this is perhaps the most worrying point – more so than arcane discussions about recession. By most yardsticks, the real recession ended in the third quarter of 2009, which means this is now the third year of recovery. Whereas the bounce-back was strong in previous recoveries, activity seems to be weak, fragile and uneven, and still some 4% below the pre-recession peak. While there has been growth, the economy is performing well below its potential, which converts into pressure on prices, margins and profits for businesses, and on jobs for many people.

What we have now could continue for a long time, particularly if the eurozone malaise staggers on, the US recovery falters, and emerging markets slow. So the argument is less about recession than it is about an economy that is growing too slowly to use all available resources, in particular labour. What we have now is starting to look like normal: a period of stagnation as the trend rate of growth eases down from more than 2% a year to perhaps about 1.5%. This would have enormous implications for unemployment, government revenues and spending, and living standards.

How do we get out of this situation in which consumers are cautious, companies are not spending, the public sector is retrenching and export markets are tightening? Falling inflation, continued low interest rates and a competitive currency will all help, but something more is needed. Over to you, Mr Osborne. ?

 

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