From the TUC

Examining the reactions to our flagging GDP (a.k.a. the slowest recovery on record ever getting even slower)

29 Apr 2015, by in Economics

A number of themes emerged in the different media commentaries on yesterday’s poor GDP results that are worth further examination:

  • the idea expressed that the figures are highly uncertain and will be heavily revised;
  • that weaker UK growth is in the context of ‘rising instability abroad’ (an argument deployed by the Chancellor); and
  • the role of construction in the deterioration in output.

Revisions

Chris Williamson (chief economist at Markit who produce the so-called ‘purchasing managers’ index’ measures of economic activity) argues that there was a “great deal of uncertainty” around these figures which are “produced very rapidly”, and in particular contested the idea that construction was in recession. The FT this morning also set rising business survey data against official figures, and cited Kevin Daly (Goldman Sachs) expecting an upward revision “perhaps to 0.7 per cent, he said”. Helpfully the FT produced a chart of revisions to put this sort of claim into context, which I have reproduced below.

Revisions to UK GDP quarterly growth

gdp2015q1_2_1

Over this period the average revision is 0.1 per cent, and while individual revisions can be large there has been no great change to the underlying story of revival at the start of 2010, retreat through to 2012 and then steadier growth from 2013. The ONS maintain in their release that “the average revision is not statistically different from zero”.

Rest of world to blame

The rest of the world is deployed à la carte in Treasury lines. If the UK is strong and the rest of the world is weak, then government policies are vindicated. If the UK is weak as well and there is “rising instability abroad”, then the rest of the world is implicitly holding us back (the wording on this occasion seems quite careful, making the association but not doing so explicitly). Even disregarding the logic, the numbers don’t really stack up – see chart.

GDP quarterly growth, per cent

gdp2015q1_2_2

Over the past year when the UK economy has been slowing, the eurozone – our main trading partner – has been picking up, albeit weakly; the US slowed into the latest quarter but these are erratic figures, and just like we shouldn’t read too much into one quarter of UK data, we should do likewise with the US; Japan on the other hand has been coming back over the past year.

That is not to say that the global environment is not important. In 2012 there was a major monetary expansion across the world with the US’s ‘QE infinity’, Japan’s Abenomics, and the UK’s FLS and help to buy. QE infinity has just been switched off, but the ECB are now stepping up to the plate. Over much of the world policymakers are still imposing austerity, though the extent varies by country. In the meantime deflationary pressures are evident across the globe. It is highly implausible that the UK is only affected by the rest of the world when things are bad.

Construction and other industries

The chart below shows contributions to GDP quarterly growth over the last five quarters, splitting out more industries than yesterday and showing unrounded figures; the last column is the difference between the latest and previous quarter.

This last figure shows the fall in GDP growth to 0.3 from 0.6 per cent was driven mainly by the ‘business and finance’, the very large category that includes for example management consultants, architects, lawyers as well as the city. Construction actually offset some of this fall, with a lower decline in Q1 than Q4 – though the main offsetting factor was ‘government and other services’.

Contributions to GDP quarterly growth, percentage points

gdp2015q1_2_3

However it remains true that while reduced, overall growth of 0.3 per cent is wholly accounted for by the service sector and in particular in the latest quarter by ‘distribution, hotels and restaurants’ (in red), as Robert Peston has emphasised. On this view, the abrupt reduction in business and finance may well be a blip, but the strength here in recent quarters has been exceptional and perhaps due some reigning in. Manufacturing contributed nothing to GDP in the latest quarter and the feeble and fading contribution of this industry over the past year can be seen in pink.

Most recognise that there has been some degree of slowdown in the economy, with manufacturing and construction very weak (whether or not the latter is in recession). This is cause for concern in its own right, but now the figures suggest the service sector too may have come off the boil.

The bottom line remains that this slowdown comes at the tail end of a parliament which has seen the weakest recovery on historical record against a backdrop of severe austerity. On present plans for even more severe austerity to come, why should we expecting anything more from GDP into the future? 

One Response to Examining the reactions to our flagging GDP (a.k.a. the slowest recovery on record ever getting even slower)

  1. 'Markit' concede increasing concerns on recovery following services PMI – ToUChstone blog
    Jun 4th 2015, 8:40 am

    […] Just ahead of the election the weakness in the GDP figures was greeted with some scepticism (see here). […]