GDP Data: Some Mysteries
The second estimate of GDP in many ways hasn’t told us anything we didn’t already know – output is expanding at a reasonable clip whilst incomes are squeezed.
Of the 0.8% growth in the third quarter, more than half (0.5%) came from household consumption – despite an ongoing squeeze in real wages. I suspect the household savings ratio will have fallen further when we get the numbers next month.
There isn’t much evidence of rebalancing in this data – investment is flat-ish whilst net trade is getting worse.
If I’m being honest the extent of the failure to rebalance is actually starting to surprise me – today’s release contains two new mysteries and maybe solves an existing one .
Mystery 1 – Net trade.
Net trade is now at its lowest level since Q3 2010.
When I saw this data I assumed that the pickup in consumption was leading to a large pickup in imports. This is often what happens as the UK experiences a recovery. But actually a closer look at the data shows that exports fell by 2.4%.
Given that Eurozone GDP slowed from 0.3% in the second quarter to 0.1% in the third, I’d expect a bit of export weakness but the extent of this fall surprises me.
Mystery 2 – Business Investment
If the initial OBR forecasts had been right (big if), business investment would currently be up almost 35% on Q2 2010. It is actually up only 1%.
But the mystery is that business investment is currently lower than it was in mid 2012. The chart below makes clear that growth has picked up but business investment hasn’t fully responded.
Now the idea that business investment would lead the recovery has always struck me as fanciful, but over the past year GDP grown by 1.5% and yet business investment is down 6.2%. This is worrying.
Many forecasters are now expecting business investment to grow in 2014, but as of yet there is little evidence to support this view.
Business investment is a volatile series and maybe we shouldn’t read too much into recent weakness but still, this again feels odd.
Mystery – solved?
Finally it is worth noting that inventories increased by £5.1bn in the third quarter (actually by more than total growth), the biggest increase in two years and 8th largest increase in a quarterly series that dates back to 1955.
In other words we have seen a ‘big’ inventory build up.
One notable feature of UK economic data in recent months has been a disconnect between PMI surveys (which point to very fast GDP growth indeed) and official data (which points to decent but not spectacular growth).
Maybe those responding to PMI surveys have seen an increase in their output but this isn’t feeding through into final demand?
Of course this actually deepens the ‘business investment myserty’ – if firms are confident and rebuilding inventories then why aren’t they also increasing investment?
All in all, a slightly confusing set of numbers.