UK Back in Recession? I'm Not Conceding Yet!
The UK GDP numbers last week were a considerable shock to me. I called that wrong without a doubt, I had been expecting 0.2 percent or 0.3 percent for the first quarter of 2012, in fact the number was down 0.2 percent. There’s nothing like getting a forecast wrong for knocking one’s self-confidence!
There are two more revisions to this statistic, but the damage has already been done. Coming on top of the -0.3 percent GDP number for the fourth quarter of 2011, the UK is now “officially” in recession.
Once individuals and corporates read that headline it impacts their spending plans, so there is a real danger of blundering into deeper recession through a minefield of statistics.
If that does indeed occur for the remainder of 2012, it would be a pity.
That’s because the first estimate of GDP is often quite inaccurate, and heavily revised. We read elsewhere how the first estimate for the first quarter of 2012 ignores critical survey results from the manufacturing and service sectors, and also didn’t include the March 2012 retail sales numbers, which showed a strong increase on the previous month.
These items get factored into the second and third revisions, but by then people have moved on to adjusting their budgets!
Richard Jeffrey, chief investment officer at Cazenove Capital, pointed out the following last week:
For instance, the first estimate of GDP for the second quarter of 2008 showed an increase of 0.2 percent. The current estimate for the same quarter shows -1.3 porcent. In contrast, the initially published growth estimate for the third quarter of 2009 revealed a decline in GDP of 0.4 percent, but now the ONS tells us there was actually an increase of 0.2 percent
These are significant changes. It begs the question: why bother with the early first estimate? It can be very misleading and drive economically ruinous behaviour.
That apart, I for one am not conceding just yet, I think the first quarter 2012 revised number will show a “+” sign in front of it. The signs around us do not point, overall, to an economy that is contracting (the March retail sales is just one illustration of this), and while it is true we have one extra bank holiday in third quarter for the Queen's Jubilee, that event in itself will witness extra spending and may be enough to mitigate, to an extent, the lost output.
There is also the impact of foreign visitors’ spending for the Olympics, which again will to a large extent counter the lost output from workers taking time off, being stuck in traffic jams, and so on.
The UK economy is still bumping along the bottom, and while the headline statistics imply a depressing return to 1970s stagflation, with rising (or, rather, high and not falling) unemployment alongside rising inflation, there is enough in the underlying statistics for optimists to hold on to for now. We’ll visit this topic again at the second, revised GDP number.
Professor Moorad Choudhry is Treasurer, Corporate Banking Division, Royal Bank of Scotland. The views expressed in this article are an expression of the author’s personal views only and do not necessarily reflect the views or policies of The Royal Bank of Scotland Group plc, its subsidiaries or affiliated companies, or its Board of Directors. RBS does not guarantee the accuracy of the data included in this article and accepts no responsibility for any consequence of their use. This article does not constitute an offer or a solicitation of an offer with respect to any particular investment.