Revised UK GDP data for Q4/2010 were released this morning. In an unexpected and unpleasant surprise, the initial estimate of a 0.5% decline was revised to a 0.6% decline. The ONS still calculates the impact of December's bad weather as 0.5% -- and I still think that's too low; see my "Shrinking no more" posting at the start of February. Even so, the upshot of the revisions is that GDP would now have been slightly lower in the quarter even without the weather effect, as opposed to more or less flat as originally estimated. Not good.
The breakdown of the figures throws up a lot of surprises. Investment spending was weak, and the external trade sector subtracted from overall activity. Bank of England Gov. King still sees fit to blame the depreciation of Sterling (most of it 3 years ago!!) for some of the current inflationary pressure, but apparently the impact of said depreciation on actual trade flows has now faded. The dominant service sector also performed poorly.
But here's the biggest surprise of all: one of the few sources of growth in the quarter was....public sector spending, which rose 0.7%. This inconvenient fact hasn't, of course, stopped Shadow Chancellor Ed Balls from blaming the weakness in the economy on the coalition government's austerity policies. Still, it does raise very uncomfortable questions about just how poorly the economy may perform once spending cuts actually start to happen, probably in Q2/2011 and beyond.
There's enough data for January (especially the purchasing managers' indices) to suggest that the economy bounced back strongly in the month, so Q1 as a whole will probably see positive growth. This is by no means certain, however, for calculation reasons. If the weakness in Q4 was concentrated in December, a bounceback in January might do no more than bring GDP back to the Q4 average. This would mean that achieving a positive result for the quarter as a whole would depend on the economy growing in February and March, which is certainly not a done deal. In any case, even if Q1 does turn out positive, the difficulties policymakers face in trying to keep things moving in the right direction after that are becoming ever more severe.
Rising global oil prices are expected to add another 5p per litre to fuel costs within the next couple of weeks. Rising costs for fuel and food, rather than spending cuts or fear of unemployment, are the factors currently most cited by consumers when they are asked why they are becoming more cautious. This will surely persuade the Government to cancel the fuel duty hike scheduled for April, a step it can inarguably afford to take: the Treasury makes out like a bandit whenever pump prices rise, thanks to VAT, and is certainly well ahead of its expected tax take from this source, even without the looming duty increase. The fact that the public finances were better than expected in January also suggests that the Chancellor will offer just a few sweeteners in his budget next month, just to stop the public mood from souring any further.
What about monetary policy? We learned this week that three of the nine members of the Bank pf England's Monetary Policy Committee voted to raise rates at this month's meeting. Today's GDP data may, of course, result in a rethink, but the fact that inflation fears are holding down consumer spending implies that a small rate hike might actually boost confidence, rather than triggering an immediate slide back into recession. A gradual return to more normal monetary conditions, accompanied by a rather less stringent fiscal stance, still looks like the desirable policy mix.
No comments:
Post a Comment