UK GDP: A nasty surprise and a puzzle

 
Chancellor George Osborne The contracting economy is putting pressure on the chancellor

Perhaps we shouldn't be so surprised. The Bank of England predicted that the extra bank holidays in June might knock half of a percentage point off the quarterly growth figure.

We also knew that the underlying rate of growth in the economy was weak to non-existent. Once you put those two things together, a 0.7% decline in national output in three months sounds at least plausible.

Many of the city analysts who were caught out by these figures are once again suggesting they are wrong, and likely to be revised. It is certainly hard to square these numbers with rising tax revenues and significant increases in employment. Business figures such as John Cridland of the CBI say the message they are getting from businesses on the ground is a lot more upbeat than this preliminary estimate would suggest.

But, these are disappointing numbers however you spin it. And they will inevitably add oxygen to the debate about the government's deficit reduction strategy - whether it has hurt the economy more than the chancellor expected, and whether and to what extent it now needs to be scaled back.

There is much talk about Britain being in the "longest double-dip recession since the war". But the double dip - the ups and downs in the figures over the past four years - is much less important than the overall result. If these numbers are right, the UK economy is now 4.5% smaller than it was before the recession started.

That would make this by some measure the worst four-year period for the UK, outside wartime, in at least 100 years - worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s (I've gone into these figures before).

Even if the figures are heavily distorted by short-term factors, they suggest the underlying state of the economy is flat, at best. They also suggest the economy has really not grown at all since the government took office in the summer of 2010. (In fact, today's numbers say the economy is now 0.3% smaller than it was then.) When the chancellor drew up his budget plans in May 2010, he was expecting the economy to grow by well over 4% in those 2 years.

Infrastructure legacy

Is Mr Osborne to blame for all that disappointment? That is what Ed Balls would naturally claim. In response, Mr Osborne would point instead to the difficult domestic legacy of the financial crisis, and the chilling effect on investment and bank lending from the crisis in the eurozone.

In effect, the IMF split the difference last week, with its estimate that fiscal tightening had caused Britain's national output to be 2.5% smaller than it would have been (though the Treasury would claim that some of that effect was incorporated in the original forecast).

I spent part of this morning interviewing the chancellor in King's Cross, on the construction site for the new Francis Crick Institute, a £620m project to build a major new medical research facility in the heart of London, which has been half-funded by the taxpayer.

It is was an interesting choice of location, and not just because it was Gordon Brown who originally approved the project shortly before the last election. George Osborne put the Crick Institute, along with other major public building projects, on hold when he came into the Treasury, but ultimately decided to go ahead with it.

Given the time lags, nearly every major infrastructure project is going to be the result of a previous government's decisions - maybe several. This was especially true of Cross-Rail, which he visited last week. (He's become such a fan of big building sites, I wonder whether the ONS is going to have to start adjusting the figures to allow for disruption caused by the chancellor.)

But you might wonder why Mr Osborne would want to associate himself so closely with a sector which has played a disproportionate part in this double-dip recession - and seems to have taken a disproportionate share of the government's budget cuts so far.

Government cuts

Today's figures show construction output down by 5.2% in the second quarter, and nearly 10% smaller than a year ago.

Obviously it's hard to quantify how much of that is due to government cuts. But we do know that nearly all of the roughly £10bn decline in government borrowing between 2010-11 and 2011-12 was down to cuts in government investment. And we know that the public sector accounted for around a third of total construction output in 2011.

Noble Francis, the chief economist for the Construction Products Association, has kindly pulled together some useful figures for me on this.

There is no breakdown between public and private sector activity for the second quarter, but the first quarter numbers show public housing output down 18% on the year, and public non-housing output (schools, for example) down 21% on the first quarter of 2011.

The figures for new orders are even more striking - especially when you consider that these are orders that will eventually filter through to output. New orders for public housing were down 41% on the previous year, and new public sector orders outside housing were 42% lower than a year before.

Some will say it's a bit rich for Labour to shout about this, when Alistair Darling had pencilled in cuts for public investment during this parliament that were every bit as large. But Alistair Darling is not now in charge and he hasn't been for two years.

Many will be hoping for a lot of medals for team GB in the coming games. George Osborne will be hoping for a big economic bounce from it as well. But the fact we are still focusing on one-off factors, worth a fraction of 1% of GDP, when we talk about UK growth tells you all you need to know about the dismal state of the economy.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 24.

    Why all the effort to justify figures that will be revised anyway. No one has any faith in the experts (have not had for a long time)..What is the point, what difference does it make. Who is paying the experts wages (salary). Will there be any compensatory back peddling when the figures are revised ..WOT A PILE OF "Nonsense "

  • rate this
    +1

    Comment number 23.

    re#6
    And what do you think the reason is?

    re#19
    Most recipes for recovery seem to encompass 'more of the same' and this is true of the Coalition with their 'Cuts' policy however feebly enacted.

    It will take real vision & courage to strike out with a different approach to plan A.

  • rate this
    +4

    Comment number 22.

    Surely the Bank of England and this journalist can't be serious!? Our economy is not so producitve that a few extra bank holidays mean half a percentage point of growth.

    Anyhow all Osborne has to do is fiddle with excuses for another quarter. After so much contraction, there's bound to be some growth reversion this quarter. Or will the heat wave create another contraction?

  • rate this
    +2

    Comment number 21.

    10. John from Hendon. So I'm a crackpot am I? Just because I haven't called for Mervyn King's resignation for the 1000th time? I'm getting bored of that particular mantra. At least Merv has called the current banking system into question. It all boils down to the question "Where does money come from?" If you don't know the answer then you'll continue to sound like a stuck record.

  • rate this
    -1

    Comment number 20.

    Unfortunately, focussing on GDP figures may lead to wrong policy choices. It has been generally recognised that the UK needs to switch from public sector to wealth-creating jobs in the private sector. There is some evidence that this is happening and the latest news from JLR is encouraging. Unfortunately (and bizzarely) the calcualtion of GDP includes spending by the public sector.

  • rate this
    +3

    Comment number 19.

    17. B "We must hold our interest rates down until the storm has passed, nothing else matters."

    This is the carry on doing what created the problem and is not a solution.

    We must put up rates to get rid of the contingently non-performing secured assets. Indeed we will have to legislate that banks must take losses at the earliest opportunity and that they will be withdrawn after that!

  • rate this
    0

    Comment number 18.

    Steph,I guess we are now firmly in the denial phase of change acceptance as you and other city commentators demonstrate with your comments here. This will soon be followed by anger (it's all George's fault for not borrowing even more money), and hopefully sooner rather than later we will move to the constructive acceptance and get on with the positive thinking about the new economic reality phase.

  • rate this
    0

    Comment number 17.

    Nasty Surprise ? where have you been for the last 4 years ? Come on, you can do better than that. The Government will do nothing until they know what everyone else is doing, We are a trading nation, our ability is dependent on everyone else, The government has it right, but for all the wrong reasons. We must hold our interest rates down until the storm has passed, nothing else matters.

  • rate this
    +11

    Comment number 16.

    Deficit

    State deficits are not being tackled in the right way.

    The right way is to cut wages to balance the budget.

    It is not to cut staff.

    This was eventually the way out of the same problem in the 1930s - a relative started teaching in 31 with a 12.5% pay cut!

    The advantage is that productivity rises and unemployment does not.

    It has to be a top down process - the rich must suffer more!

  • rate this
    +16

    Comment number 15.

    If this doesn't tell you that the economy is broken then what will? It is not doing what it ought to be doing so something is either wrong with the measurment or the interpretation.

    With the BofE printing money to keep its chums in the City happy there has to be something badly wrong.

    I think it has more to do with the wholesale clearing down of debt across the board.

  • rate this
    +7

    Comment number 14.

    Is there anything at all that the UK as an economy outside of the Euro can learn at all from the economic recovery in Iceland?

  • rate this
    +9

    Comment number 13.

    6 A "why 'they' are not doing what you(me) suggest,"

    Greed, stupidity, lack of understanding, cowardice, incompetence, etc. Just as in the 1930s the powers that be were totally resistant to fixing the problem. But you know this!

    Simply: It cannot be a solution to a problem to amplify what you did to create the problem and expect it to provide a solution. (i.e. more debt to solve xs debt!)

  • rate this
    +16

    Comment number 12.

    'Perhaps we shouldn't be so surprised' no you shouldn't be. If you are going to call yourselves economists you need to throw away the models you have been using because they keep coming up with the wrong answer and leave you surprised. New models required and I suspect new economists too and if 1 bank holiday can derail the economy then the problem is much worse than the BAU economists think.

  • rate this
    +21

    Comment number 11.

    Extra bank holiday in leap year though! i'm no Mathematician but shouldn't it all balance itself out........

  • rate this
    +3

    Comment number 10.

    1. satm "Publicly-issued interest-free money"

    Crackpot - this has been shown to only lead to hyperinflation & complete collapse.

    We must make money have a positive price once again. It has to be made valuable. Only than can the realignment start to take place. Your solution is to kick the can down the road which will only make matters worse. As QE and bailing out Greece/Ireland/Spain etc.

  • rate this
    +3

    Comment number 9.

    Stephanie, as a macroeconomist isn't the big puzzle rising employment and falling output? Surely this can only mean one thing-falling productivity.

    However, is it possible that, due to the reecession and reduced consumer spending power, part of the UK workforce has simply shifted from producing high value added goods and services to lower value added ones? It's just a hypothesis.

  • rate this
    +6

    Comment number 8.

    The size not the fact of a fall is surprising for those who believe Micawber moneynomics is the answer & all the Chancellors has to think about are literal housekeeping methods of cutting the deficit. The fact is that the length & depth of the recession is home grown just like the austerity on the continent The drop in unemployment is a lagging feature of the recession & this will start increasing

  • rate this
    +4

    Comment number 7.

    To have contracted 0.3% since the election, midway through a period of QE and low rates also tells you the situation is far worse. Private sector needs no excuse to sit on their hands re: investment and de-leveraging. The Euro monetary contraction and political vacuum will only exacerbate general trading, even before we get to weakening China and fiscal cliff USA...Battle Bowlers on folks!

  • rate this
    +1

    Comment number 6.

    5 JfH
    We know, we have been reading it since the crash. Try trying to work out why 'they' are not doing what you suggest, there will be a reason.

  • rate this
    +9

    Comment number 5.

    The way out

    Asset and debt deflation MUST take place before we can emerge. (See the studies of the 1930s that indicate that after the deflation business can once again start up.)

    So first priority to to get the deflation started. IT WILL KILL PARTS OF THE FINANCIAL SECTOR this is inevitable.

    The regulators have to push up interest rates substantially until the deflation and shake out starts.

 

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