What the GDP figures mean
Will there be another recession in 2011? Today’s revised estimates for GDP in the last quarter of 2010 make that a reasonable question to ask. They show output in volume terms down 0.6 per cent from the previous quarter (last month’s initial estimate was a 0.5 per cent fall). This means that the UK economy grew by just 1.5 per cent in 2010 – well below the ‘trend’ rate of 2 – 3 per cent and very disappointing for a country just emerging from recession.
The Office for National Statistics still estimates that the effect of the bad weather in December was to cut growth by 0.5 per cent, so this is a genuine revision downwards. The breakdown of the revisions is especially worrying – manufacturing output (on which so many hopes rest) has been revised down by 0.3 points and services (most of the economy) by 0.2. Construction output has been revised up but this is a rather erratic element and in any case the revised figure is still for a 2.5 per cent fall from the previous quarter.
If we turn to the expenditure approach the picture is no more encouraging. Household spending fell 0.1 per cent from the previous quarter and was only 0.4 points higher than in the same quarter of 2009, when we were just emerging from recession. Fixed capital spending fell 2.5 per cent and the deficit in net trade grew to £10.2 bn from £9.3 bn in the previous quarter. (And the outlook for trade took a turn for the worse today with the downwards revision of the US growth figures.)
The only bright spark is government spending, which grew 0.7 per cent and is now 1.2 per cent higher than in the same quarter of 2009; the government, of course, is hacking away at this.
There’s plenty of other indicators to worry about as well as the GDP figures. The ONS also released the provisional Business Investment figures for Q4 2010, showing that business investment (seasonally adjusted) fell by 2.5 per cent from the previous quarter – due to a 3.1 per cent fall in non-manufacturing investment, manufacturing investment rose 4.6 per cent. Manufacturing investment fell in chemicals, engineering and textiles (industries which account for over half of of all manufacturing investment) but rose in metals, food and, especially, in “other” manufacturing. Analysed by type of asset, investment in vehicles fell and construction rose, but investment in other capital equipment (84 per cent of manufacturing investment last year) only rose by 1.3 per cent.
The December Index of Services, also published today, showed a 1.3 per cent fall in services gross value added from November and a 0.6 per cent fall from December 2009. Distribution was down by 1.4 per cent from Dec 09 (mainly due to a 4.7 per cent fall in motor sales, probably due to the end of the scrappage scheme.) Hotels and restaurants were down 5.4 per cent from 12 months previously, transport, storage and communication down 2.3 per cent and even business services and finance were down 0.8 per cent. Compared on a quarterly basis, like the GDP figures, the Index of Services in Q4 was down 0.7 per cent from Q3, 0.6 of which was due to the weather – in other words, even without the snow factor, services failed to grow in the final quarter of last year. As services make up two thirds of the economy, this is worrying.
Two recent sets of data paint a continuing gloomy picture of the household sector. Admittedly, the GfK NOP Consumer Confidence Index increased one point this month, but it is still at minus 28. Ominously, perceptions of how the economy has performed over the last twelve months and how it will perform over the next twelve both slipped a point.
And finally, yesterday the CBI released its quarterly Distributive Trades Survey, which showed 36% of retailers saying sales n the first two weeks of February were higher than they had been a year previously, compared with 30% saying they were lower. The overall +6% result was much lower than the +25% the CBI says was expected. Looking ahead, 63 per cent expected sales in March to be the same as a year previously, just 15% expecting an improvement and 22% saying they would be lower.
Last month, I said that the first estimate was “bad, very bad“, showing a 0.5 per cent fall from the previous quarter. But I have to admit that I thought that today’s figure would be an upward revision – an actual contraction was so much worse than what I expected. If the 2011 Q1 figure is also negative we will formally be back in recession, but the depressed state of households and businesses is more important than technical nitpicking.
Unions need to send two strong messages about today’s storm of bad numbers. Firstly, it would be mad for the Bank to raise base rates substantially – they would feed through to the interest rates paid by businesses and families, hammering the recovery still further. Secondly, our message that cuts put the recovery at risk is more important than ever. Coming to the March for the Alternative is more important than ever.