UK GDP Predictions Mask Weakness: Economists
Speculative UK GDP statistics for the third quarter may give a falsely positive picture of the economy, economists told CNBC.
According to predictions by the National Institute of Economic and Social Research (NIESR), the UK economygrew by 0.5 percent in the third quarter, a significant gain on the 0.1 percent growth recorded in the second quarter.
Full details of overall third quarter public spending are yet to be published.
However, economists said the increase in growth reflected temporary factors which subdued the economy in the second quarter, rather than a change in underlying fundamentals going into the third.
“Clearly there will be an element of bounce back from the second quarter, which was artificially subdued because of the Japanese disaster [the tsunami] and the extra bank holiday [due to the royal wedding], so there was always going to be a bit of a catch-up in the third quarter,” Michael Taylor, senior economist at Lombard Street Research, told CNBC.com.
Second quarter industrial production, particularly car manufacturing, was hit strongly by the tsunami, with the sector experiencing a 4.6 percent decline in output. NIESR predictions suggest industrial production recovered in the third quarter, with output rising by 0.2 percent.
According to both Taylor and Samuel Tombs, UK economist at research firm Capital Economics, the combined effects of the tsunami and the extra bank holiday subdued GDP growth by 0.5 percent in the second quarter, reducing it from 0.6 percent to 0.1 percent.
However Commerzbank economist, Peter Dixon, doubted whether the “bank holiday effect” in the second quarter was sufficient to produce rebound growth of 0.5 percent in the third.
“We have seen a modest rebound in manufacturing in the third quarter, but it is not huge,” Dixon said.
“Given the weight of the manufacturing sector in calculating GDP, it would have to be a hell of a rebound. Does it explain 0.5 percent growth in the third quarter? Questionable,” he said.
Other than a resurging manufacturing sector, the NIESR data also suggested government output rose by 2.6 percent in the third quarter, up from 0.4 percent in the second.
According to the Office for National Statistics (ONS), public spending in August this year was £15.9 billion ($25 billion), an increase of £1.9 billion ($3 billion) on August 2010, and £2.9 billion ($4.6 billion) above market expectations.
This reflected a £3.5 billion ($5.5 billion) increase in central government spending, and a £0.6 billion ($0.9 billion) increase in borrowing by local authorities and public corporations.
“Either public sector consumption, or investment is up. My hunch is that it is the investment side of things that has held up a little better,” said Taylor.
Dixon said: “I suspect NIESR are basing their numbers on the published government accounts which are a) incomplete, b) given in nominal terms , so have to be deflated and c) subject to significant seasonal adjustment problems. The numbers do sound odd with everything we know about the government’s status on austerity.”
But an economist at the NIESR told CNBC.com that the institute does not use the published government accounts for its data.
"We do not and have never used the Public Finance data in our monthly estimate of GDP. The methodology was published in the Economic Journal in 2005," Simon Kirby, NIESR economist, wrote in an email.
Even allowing for a subdued second quarter, both Dixon and Tombs said NIESR’s third quarter figures were surprisingly strong.
“They look very high at 0.5 percent for the third quarter,” said Dixon. “0.2 percent or 0.3 percent would be as high as I’m willing to go. I would go with 0.2 percent.”
However Deutsche Bank’s chief UK economist, George Buckley, said the NIESR figures were “completely reasonable”. He added: “The underlying trend is probably relatively weak. I wouldn’t be surprised to see a relatively flat fourth quarter.”
Taylor said: “In the fourth quarter we will get back to a more representative growth rate, in line with the underlying trend, which could be flat, or even a small contraction. I expect it to be significantly lower than for the third quarter.”
The economist said accelerating inflationinto the fourth quarter would hurt consumers’ real incomes, which could cause a further fall in the consumer consumption component of GDP.
According to the ONS, the UK’s annual inflation rate reached a 3-year high this September at 5.2 percent, considerably above the Bank of England’s 2 percent target.
However, Buckley predicted inflation would decline during 2012. This, coupled with an exceptionally weak sterling , low interest rates, and the impact of a second round of quantitative easing , should allow for a gradual recovery in growth, he said.
“The UK economy is very affected by the euro zone,” said Buckley. “We export about 50 percent of everything we produce to the euro zone. It has a direct impact on financial markets, on general confidence, and on employment.”
Speaking with regards to the NIESR report, a spokesperson for the UK Treasury said:
“While the UK cannot isolate itself from what is happening to our major trading partners, the action being taken by the Government to tackle the deficit and rebalance the economy is helping the UK economy to continue to grow.”
“The economy is recovering, but the financial turbulence in the euro zone and the weaker outlook for global growth means the recovery will be choppy,” he added.
Despite the third quarter gain, the NIESR report said UK GDP was still 4 percent below its pre-recessionpeak, “suggesting this recovery will be the weakest of any since the end of the first world war”.
Correction: A previous version of this story incorrectly identified government output as government spending.