From the TUC

The GDP Numbers: Five Key Points

25 Jan 2012, by Guest in Economics

I wrote this morning, before the GDP figures were released, that they were unlikely to tell us anything we didn’t already know. The quarter-on-quarter contraction of 0.2% was a little worse than expected but not especially surprising. It’s always important not to over-analyse one data point – especially one subject to revision – but the key trends have been clear for some time.

The two key facts were already evident before this morning’s release – this is the worst ‘recovery’ in modern British economic history and GDP per capita is not expected to regain 2007 levels until 2016. In other words, on the OBR’s numbers we are already in a ‘lost decade’.

Today’s numbers though do tell us something. The five key points, as I see them, are:

1/ The awful manufacturing numbers suggest that an ‘export-led recovery’ is unlikely. The Eurozone crisis is starting to have an impact on GDP figures, one that is set to continue and worsen into 2012.

2/ But the Economy was already stagnating well before the Eurocrisis. The stagnation in the service sector at the end of 2011 is part of a long-running collapse in domestic demand. Something that can’t be blamed on Europe. Exports prevented us from falling into recession in 2011, that prop to growth now seems unlikely.

3/ This fall in GDP is a lot more worrying than the one in Q4 2010. Back then ‘special factors’ (the snow) were at least partially to blame and so GDP bounced back in Q1 2011. This time GDP fell without ‘special factors’.

4/ The -0.2% result was a tad worse than the OBR expected (-0.1%). It appears the November forecasts are already looking a bit too optimistic. Again.

5/ In terms of the impact of austerity, it has been noted that ‘government services’ was one of a few bits of the economy actually growing in Q4. But ‘government services’ in this GDP release don’t map exactly to ‘government spending’. The large fall in construction output could be linked to the government’s cut in its own investment, equally the stagnation in the service sector is at least partially caused by the VAT rise.

Does this mean that a double-dip recession (I.e. two quarters of negative growth) is now likely? It’s certainly more likely than it was before the release but in some ways, despite being politically charged, it’s an irrelevance.  Unemployment is rising, living standards are being squeezed and the per capita GDP is likely to fall regardless.

5 Responses to The GDP Numbers: Five Key Points

  1. “Hurting but not working” « The Guerrilla Economist
    Jan 25th 2012, 11:41 am

    […] Weldon of the TUC has posted on the Touchstone Blog a list of 5 key points concerning GDP. They are: 1/ The awful manufacturing numbers suggest that an ‘export-led recovery’ is […]

  2. Gareth
    Jan 25th 2012, 2:17 pm

    More important news: the Bank of England still thinks that the risks to inflation are well balanced, i.e. they think demand growth is about right; faster demand growth might just be inflationary.

    “Against this background, the Committee agreed that a decision to change policy at this meeting was not warranted.”

    “But there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.”

    Why aren’t the TUC economists complaining about that bunch of rubbish? You should be screaming from the rooftops.

  3. Larry Sportello
    Jan 25th 2012, 4:27 pm

    “The -0.2% result was a tad worse than the OBR expected (-0.1%). It appears the November forecasts are already looking a bit too optimistic. Again.”

    I think the dig is a bit preliminary even given the OBR track record. Many of the estimates have been revised upward and if the OBR had said 5.1 and the estimate was 5.0 I doubt you would make the same comment even know the amount is the same.

    I wonder also if this is all just due to a high deflator attached to the market price GDP increase because of high inflation in Q4. Q3 current price growth was 1.5% but was deflated to 0.6% at a time of high inflation (4 to 5% RPI).

  4. Gareth
    Jan 26th 2012, 12:46 am

    “a high deflator attached to the market price GDP”

    We should retain that hope, yup. Nominal GDP growth in 2011 is still likely to be pathetically weak, less than 4%.

  5. jonathan
    Jan 26th 2012, 8:03 pm

    One thing I’ve been thinking about in relation to the UK economy is the outsized role the financial sector has played. Same thing has been true in the US – look at the proportion of profits attributable to the financial sector during the bubble. Turns out those profits were illusory, but they seemed real back then.

    The financial sector is barely into a massive change that will see smaller returns. Less employment. More automation. This will have a long term effect.

    Along with the financial sector’s size has been a steady flow of money through London. Some stays. It props up home prices. It keeps restaurants full. That flow has continued, with the drop in some areas made up by increases in others. The UK is not on the Euro so that draws money, even as the Eurozone bank funding methods that used to draw money – helped by the “light touch” secrecy regime – have decreased. Will that continue? If not, then things will worsen.