Economist Questions Impact of 'Special Factors' on UK GDP

The claim by the UK Office for National Statistics that the country's second quarter GDP growth could have been as high as 0.7 percent, were it not for 'special factors' like the royal wedding and the Japanese tsunami, has been described as "bizarre" by economist Ruth Lea.

Tower Bridge and City of London financial district
Source: Dominic Burke | Getty Images
Tower Bridge and City of London financial district

An extended holiday in April for the royal nuptials hit the economy as people missed two working days to celebrate the occasion, but Lea said she believed the impact had been exaggerated and it was unlikely that the UK economy would have grown by as much as 0.7 percent without so-called "special factors".

"That is extraordinarily high, and I'm quite surprised about that. That's the figure I actually question, not the 0.2 percent," she said.

First quarter growth was 0.5 percent, a bounce back from the fourth quarter of 2010, Lea said.

However, with the soft data on services and manufacturing, it is hard to attribute the slow growth in the second quarter to the tsunami or the royal wedding, she added.

Lea said that if the ONS' claim was true, third quarter GDP figures should be strong due to a lack of those "special factors".

"Let's just say they're right, then when you get to the third quarter figure of course you expect a terrific bounce back, because I assume there will be no more royal weddings… well Zara Phillips will be getting married, but at least there will be nothing like the one we had in the second quarter, and indeed the tsunami effects will be feeding through," she explained.

"But again I wouldn't have thought the tsunami effects were that great in this country because manufacturing isn't such a huge part of our economy, but this does tell you that we'll be looking forward to the third quarter to see how many of these special factors unwind," Lea added.

Eyes on the Bank of England

The preliminary data suggests that sluggish growth will continue to plague the UK economy and Lea warned against ruling out quantitative easing measures by the Bank of England.

"I think even if we assume that these figures are correct, the figures do seem to be weakening, the economy seems to be weakening and of course our major overseas partners seem to be weakening. The latest numbers, the PMIs out of France and Germany seem to be down and of course we know the US economy is going through a soft patch," she said, referring to the Purchasing Managers Index surveys of the private sector.

"I think that our economy really will struggle to grow and of course in the meantime the fiscal retrenchment will have that effect of deflating the economy, so I wouldn't rule (quantitative easing) out at all, and I would say to the Bank of England keep those interest rates low as well, even though the CPI inflation is running ahead at four and a half percent," she added.

Lea also explained that sterling is likely to remain weak given the reluctance of the Bank of England to raise interest rates, despite the European Central Bank hiking interest rates by 25 basis points in April and again in July.

"I think under those circumstances and given the weak growth outlook, I'd have thought sterling will remain pretty weak," Lea said.