The UK is almost certainly not back in recession – the official figures are quite implausible – but growth is certainly worryingly slow and the signs that it might pick up later this year are mixed at best. First, why the figures are likely to be wrong; second, why growth is nevertheless disappointing; and third, what is likely to happen in the months ahead.
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As far as the numbers are concerned there are two points to be made. One is that the Office for National Statistics has seriously underestimated growth in the past.
For example, in the third quarter of 2009 GDP was initially estimated to be minus 0.4 per cent, giving rise to headlines that the US and much of continental Europe had emerged from recession whereas the UK had not. Actually, we now know, the economy grew by 0.2 per cent, but it took two years for the true figures to emerge. So poor Gordon Brown had to defend his government in the light of bad figures, only to discover when he was out of office that they were quite good ones after all. He has a right to feel sore about that.
So the ONS got the timing of the emergence from recession wrong in 2009. It also got growth wrong in 2010. As the Office for Budget Responsibility pointed out last month, its initial estimate was 1.4 per cent. It then made a series of upward adjustments, with the most recent number being 2.1 per cent. It may be further revised up in the future.
The second point is that this latest published GDP figure does not square with other data. Thus the CBI notes that these figures are "surprising" and adds: "In particular, the weakness of the services sector data does not tally closely with a range of survey indicators suggesting that the sector has been picking up through the first quarter." Some CBI survey data is shown in the first graph. As you can see, there was a particularly marked upturn in business and financial services, a sector that the ONS thinks actually declined in the first quarter.
The Ernst & Young ITEM club goes further. Its chief economic adviser, Andrew Goodwin, writes: "Our reaction to these figures is one of disbelief. The divergence between the stronger survey data and dire official output estimates is virtually unprecedented and must raise significant question marks over the quality of the [ONS] data."
The particular chunk of the data that seems out of kilter with the evidence is the services output, shown as up only 0.1 per cent on the quarter. Goodwin notes: "The monthly data suggests a serious loss of momentum in February and March, yet the surveys are reporting rapid growth and retail sales were up almost 2 per cent in March alone."
So now to the "why growth is nevertheless disappointing" point. You would expect, after a very sharp fall in output, for there to be more of a bounce. When an economy goes into sudden recession people put decisions off. But there comes a stage when they can no longer do so: companies have to refurbish or replace plant and people have to buy new items. We got that bounce, but it has not been sustained. You can see how the different bits of the economy have moved in the second graph, with services clambering back slowly but manufacturing and construction still struggling.
Even allowing for the under-reporting of growth noted above, this is a disappointing recovery and those of us who expected a sharper rise have to admit that. I had expected output to be back to its previous peak by the end of this year. That is now out of the question.
What has gone wrong? We are too close to the problem to give a good answer, but we can identify several elements.
One is that the scale of the debt burden – public and private – was so huge that it would be naïve to expect much growth until debts are perceived to be under control. Individuals have made a start on paying back their debts – that ugly word "deleveraging" – but the Government has not begun: it is merely adding to the national debt, now past £1 trillion, more slowly.
Another is that external conditions – particularly in Europe – have been adverse.
A third is that we have been bad at controlling inflation, worse than the US or Europe, and in some measure that must be the responsibility of the Bank of England. I don't think we know yet why the Bank's performance has been so bad, although the judgment of some members of the Monetary Policy Committee has clearly been poor. What is beyond dispute is that its failure has been very damaging.
So what happens next? The good news is that most of the survey data is reasonably positive and some of the actual numbers – retail sales, employment, for example – are not bad. Total employment is creeping up again and although it is down on last summer, it is higher than it was a year ago. The house builders are reasonable cheerful; private car sales were up in March. Given the relentless shower of gloom being dumped on to the British public, things have held up pretty well. The new Nationwide consumer confidence index is at a nine-month high; that is not consistent with recession.
The bad news is that this modest optimism is fragile. The company sector, taken as a whole, has cash, but investment levels remain low. The companies that lack the cash find it hard to raise money from the banks, although here it is almost impossible to distinguish between lack of demand for funds and lack of supply. And then there is Europe.
My best guess remains that the UK economy will see modest growth this year. Were inflation to fall faster than currently expected, second half growth could correspondingly surprise on the upside. But things remain finely balanced and the rapid 3 per cent-plus growth that is needed to cut the deficit remains uncomfortably far off.Reuse content