Hamish McRae: Better times are around corner but quality of stats must rise
Thursday 26 July 2012
Outlook Yet another implausible set of GDP figures underlines the point that the country needs as a high priority to examine what has been going wrong at the Office for National Statistics.
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To have headlines declaring that the economy had shrunk by 0.7 per cent in the three months to end-June was, in the yah-boo of politics, embarrassing for the coalition. But this should not be a party-political issue. The previous government suffered equally when the ONS got the timing of the exit from recession wrong, initially saying we were still in recession when actually we had, like most other countries, returned to growth. If it is childish for politicians to use dodgy data for political ends, it is intolerable for the country as a whole to have statistics of this quality.
By coincidence, within a few minutes of the GDP release yesterday the CBI produced its quarterly industrial trends survey. This is what the CBI said in its introduction to this: "The UK manufacturing sector is showing resilience in the face of challenging economic conditions, with orders and output growth steady…Both measures of activity indicated modest growth in the three months to July, while manufacturers' optimism about the general business situation was broadly stable relative to the previous three months."
This comes on top of extremely encouraging employment figures, which showed in the three months to end-April, the private sector added a net 205,000 jobs, the second-highest rate of job creation ever. This is not, as you can see from the left-hand graph, consistent with a shrinking economy. We are getting close to the peak in employment at the top of the last cycle, though officially the economy is some 4.5 per cent smaller. As Chris Wilkinson of Markit points out, if the official figures of GDP were correct the UK economy would be shrinking faster than Spain's. Not even the most unutterably dismal economist could think that is the case.
It is perfectly possible that there might have been one quarter of negative growth over the past year and this may be it. But pull all the other data together and the figures would be consistent with an economy growing at around 1 per cent a year. That would be disappointingly slow. But I suppose it is understandable given what is happening across the Channel and given the debts households have to pay off. The latest banking figures confirm people are still doing that.
So what happens next? Everyone seems to expect a bounce in GDP in the third quarter but I would be suspicious of that too. What matters most, more important even than what happens to the eurozone economy, is what happens to inflation. Private-sector home demand accounts for half total demand, whereas exports to the eurozone are only about 8 per cent of demand. So while declining exports to the eurozone are worrying and inevitable, if the 50 per cent of demand from the home market is sustained, growth will be sustained.
That requires real incomes to start rising, which means inflation to fall below money wage growth. This has not happened on an annual basis but as an observant reader has pointed out, this is starting to come through if you do the sums on a three-month or six-month basis. Come the autumn the worst of the squeeze on living standards should be behind us.
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