GDP – much worse than expected
As Nicola has pointed out, today’s GDP figures are bad, very bad. The figures are the preliminary estimate for the last quarter of 2010 and it is important to remember that there will be a much more accurate figure next month. Even so, the 0.5 per cent fall from the previous quarter means that the economy grew by just 1.7 per cent last year. This shifts the overall picture from one of continued recovery (but with worrying weakness) to one that looks as if recovery has stalled:
The picture is much the same across most of the sectors of the economy:
Percentage change in output Q4 2010 compared with Q4 2009
|Distribution, hotels & restaurants||+ 0.5|
|Transport & communications||– 0.1|
|Business services||+ 0.9|
The bright sparks here are construction and manufacturing. Earlier in the year, construction held the overall average higher than it would otherwise have done, there was a boom in retail-related building, a final flurry of government investment and some effect from the Olympics, but that mini-boom is now over and the quarter on quarter result was a 3.3 per cent fall. As I’ve mentioned before, manufacturing remains the economy’s best hope, but it doesn’t account for a big enough proportion of overall GDP to make up for government cuts by itself. The positive figure for government output in this table is a useful reminder that most cuts haven’t yet happened, but they have begun: the quarter-on-quarter figure is a 0.2 per cent drop.
Obviously, the unusually bad weather last year is one of the factors underlying these results. The government seems likely to seize on this: Vince Cable has said that the “pretty bad quarter” came about “for reasons that are primarily to do with climate, actually.” But this isn’t a sustainable argument. The Office for National Statistics release makes it plain that, even without the effect of the weather, there would have been a disastrous decline to zero growth:
The change in GDP in Q4 was clearly affected by the extremely bad weather in December last year. The disruption caused by the bad weather in December is likely to have contributed to most of the 0.5 per cent decline, that is, if there had been no disruption, GDP would be showing a flattish picture rather than declining by 0.5 per cent. We should emphasise that this assessment of the effect of the bad weather is the best we can make it at this stage, but is still inevitably uncertain.
Zero growth would not have been a good result – until a few days ago, even forecasters who had taken account of the weather were expecting a lower, but still positive result. The Telegraph, for instance, reported last week that “the consensus forecast is for 0.5pc quarter-on-quarter growth.”
Today also saw the publication of the Index of Services for November – that is, before the worst weather. Services make up two thirds of the economy, and this figure shows a year-on-year increase in output of just 1.5 per cent with growth to the last 3 month period from the previous one of just 0.5 per cent. If we look at 12 month growth rates for each month last year there’s a fair bit of variation, but it rather supports the notion of the economy stalling at the end of the year:
There are some other worrying indicators. Insolvency practitioners Begbies Traynor produce a quarterly Red Flag Alert report. Their latest, published yesterday, shows that, in the last quarter of 2010 there were 147, 836 UK companies facing ‘significant’ or ‘critical’ financial problems – up 4 per cent on the same quarter in 2009. This was the first year on year increase for 7 quarters and a 20% increase from the previous quarter. A vote of no confidence in the future can be seen in the “marked increase in actions taken by trade creditors against their debtors.” The company expects a ten per cent increase in the number of formal insolvencies from 21,500 in 2010.
Yesterday Markit and YouGov released their latest Household Finance Index, showing the lowest overall result for 20 months. The index is constructed so that a figure over 50 shows an improvement, below 50 a decline. The index has been below 50 for over a year, and the 36.1 figure in the January release is down from 39.9 in December. The index for how people expect future months to go is also very low – 36.5 – with poor numbers for both public (30.5) and private sector (40.3) workers.
Of course, it’s far from certain that we’re heading for a double dip. The figures may be reversed up next month and the 2011 Q1 results should show some improvement. But they do indicate just how fragile the recovery is and what a gigantic risk massive cuts will be. It isn’t too late for an emergency Budget to reverse the cuts, all it takes is a government with the courage to admit it’s been wrong.
Post script – today also saw a new set of Public Sector Finance figures. For the first time these include the Royal Bank of Scotland and Lloyds; this has a massive impact – adding £1.3 trillion to Public Sector Net Debt. No doubt we’ll soon be hearing from people pointing out that net debts are equivalent to 154.9 per cent of GDP. Remember that, if we exclude the nationalised banks, that figure is 59.3 per cent and that we got something quite valuable in return: as the Office for National Statistics points out, while the debt figure is net of liquid assets, the banks also have massive illiquid assets (hundreds of thousands of mortgages, for instance.) There’s every possibility that, when the banks are sold back to private investors, there will be an overall profit (which will produce a nice war chest for whatever government is in power at the time.)
Although today’s PSF figures don’t show any real change you can’t ignore the possible psychological impact and it’s possible that there could be an impact on sterling or government debt. If so, it’ll be hard to distinguish from the genuinely bad GDP results but neither means that it’s time to start raising interest rates.