Britain's zig-zag economy

  • 5 April 2012
  • From the section Business
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When Sir Mervyn King spoke of the "zig-zag" pattern we could expect in 2012, he wasn't wrong.

Official data - and private surveys - have been all over the place lately.

But the underlying message has not changed: the recovery is still fragile, and so is the optimistic mood we have seen in global financial markets since the start of 2012.

The Organisation for Economic Co-operation and Development does not exactly have a shining record as a forecaster.

When it said recently it expected the UK economy to shrink slightly in the first quarter of 2012, I did wonder whether the downbeat prediction would turn out to be a counter-indicator - a sign that we had definitely avoided a double dip.

And so it proved - at least until Thursday. No sooner had that forecast come out than we had a string of upbeat business surveys suggesting that growth in the first three months of 2012 might be stronger then we thought.

The purchasing managers survey for manufacturing - the PMI - hit a ten-month high in March, and the service sector survey for that month made back nearly all of the fall of the previous month.

On their own, the PMI surveys for the quarter as a whole are pointing to growth of around 0.5% in the first three months of the year.

That's roughly what the Bank of England has been expecting - but significantly above most city forecasts.

But, as the PMI's manufacturing numbers confirm, the picture painted by these private surveys is a good deal stronger than that shown so far by the Office for National Statistics, which highlighted an alarming 1% fall in official manufacturing output in February.

'Best guess'

What are we supposed to conclude from all this?

First, the surveys are unlikely to be completely wrong. When you look back at the past few years, they have been a pretty good guide to where the economy is heading.

However, as Geoffrey Dicks at Novus Capital markets pointed out recently, short-term, the correlation with the official data is pretty weak.

On a month-to-month or quarter-to-quarter basis the surveys are not good at telling us what the ONS will come up with - even if they do tell us which direction the wind is blowing.

Second, the best guess is still that the UK will record very modest growth in the first quarter. But if so it will rely heavily on the relative strength in services.

Weakness in manufacturing and - especially - the construction sector could all too easily mess things up.

But, finally, even if we avoid a technical recession we cannot assume that the second quarter will bring more growth. Indeed, with the extra Bank Holiday the figure could very easily be negative.

Since the autumn of 2010 the UK has shrunk in three quarters and grown in two.

The best guess now is that it will grow slightly in the last quarter, then stagnate or even fall slightly in the spring, before gathering some steam in the second half of the year. But that is all it is - a guess.

UK and global investors seem to believe, among other things that the eurozone crisis is over; that the US economy is back on track for a "typical" recovery; that the price of oil will not seriously disrupt global growth; and that China will engineer a soft landing for its economy.

Even if those brave assumptions turn out to be right, there will surely be plenty more zigs and zags in the UK recovery before 2012 is done.