GDP: no cause for Bank to raise interest rates
Today’s preliminary results for GDP in the first quarter of 2011 weren’t as bad as they could have been. A second quarter of negative growth, producing a double-dip recession now was possible, and we have avoided that. (Probably – remember these are preliminary results, often revised.) And its good news that growth in every industry except construction was positive: in the last quarter of 2010, “distribution, hotels and restaurants”, “transport, storage and communications”, “business services and finance” and “government and other” all showed negative growth. The growth in these industries may be low, but it’s still an improvement.
On the other hand, 0.5 per cent has got to be disappointing, despite George Osborne’s pre-emptive claim at the start of the week that the economy was “in roughly the right place.” For one thing, many people were expecting something better. The government’s own Office for Budget Responsibility forecast 0.8 per cent and the National Institute for Economic and Social Research’s monthly forecast put growth at 0.7 per cent in the first three months of the year (though 0.5 is within their range of error.)
For another – remember the figures for the last quarter of 2010? The Office for National Statistics estimated that the bad weather “had a negative contribution to growth of approximately 0.5 percentage points.” We didn’t have that bad weather in the first quarter of 2011, so an economy that was flat – no growth at all – would have had a quarter-on-quarter increase of slightly under over 0.5 points. Joe Grice, the ONS’s Chief Economist says that GDP is on a “plateau”, but I rather liked the summary in the FT’s Alphaville blog:
Putting the “stag” in stagflation
Finally, I’m sure that one contribution to growth that government spokespeople won’t mention is the fact that “government and other services” grew 0.7 per cent (i.e., above the overall average) compared with a decrease of 0.1 per cent in the last quarter of 2010 – they had actually increased 1.4 per cent from the same quarter in 2010. Without this item, overall growth would have been about a third of a per cent, not a half. This cannot continue; the cuts have started in earnest and the government contribution for the next dozen or so quarters will probably be negative.
Ahead of today’s results, Duncan Weldon set out some standards for judging these figures
any number below 0.5% would be terrible, 0.6% to 1.2% would be merely bad, 1.3% to 1.7% would be reasonable (i.e. what we should expect but nothing to get excited about) and over 1.7% would be good.
In other words, we’ve avoided a disaster, but we’re a long way from the sort of recovery needed to bring down unemployment and restore living standards. It’s still a fragile economy, and the cuts are still a threat to the recovery.
I really hope the Monetary Policy Committee comes to the same conclusion. Each month, the inflation ‘hawks’ argue for higher interest rates; the negative growth at the end of 2010 has been one of the factors holding back the majority on the MPC from supporting them. If they listen to the Chancellor, and agree that we’re in “the right place” there’s a small risk of a rate rise. One or two quarter per cent increases might not do too much damage in themselves – but the only point of such increases would be to signal that bigger rises are on their way. The damage this would do to business and consumer confidence would be very dangerous when we have such a weak recovery.