As monetary policy makers sit down to discuss interest rates this week, and officials at HMT put the final details together for the ConDem's first normal Budget, one question will be lurking in the back of everyone's mind: what has happened to economic growth at the start of this year?
After the shock -0.5% reading from the first estimate of growth in 2010 Q4 – subsequently revised down to -0.6%, rather than up – some of the rather more excitable economic commentators have started murmuring again about an immediate double-dip recession hitting the UK. Happily, much of that noise has now dissipated, following decent readings from the latest survey indicators and some more positive signals from the economic data. Wednesday's trade figures, in particular, showed a sharp reduction in the trade deficit from £5.5bn in December to £3.0bn in January, partly reflecting 'exceptionally high' imports of aircraft at the end of 2010. That £2.5bn swing is the largest single improvement (in cash terms, at least) on record, and – barring disasters – should set the UK up nicely for a positive contribution from net trade in the first quarter.
The problem is, while everyone is looking for a positive number, no one is sure quite how positive growth will be. If the ONS is right and the snow knocked around 0.5ppts off growth in Q4, then adding that back on is a reasonable starting point for a guess. That means that if the ONS were to publish a figure of +0.7% on 27 April – which is, historically speaking, trend growth for the UK economy – underlying activity in the first quarter was actually pretty weak. If the economy really grew at trend, abstracting from the snow, we should be looking for something like +1.2%.
One problem here is that it's currently quite hard to get a handle on what the GDP data will be before they come out. While we have official data on trade and retail sales released during the quarter, which helps build up a picture, there are no official figures on investment or stockbuilding ahead of the second release of GDP. And because these latter components are typically quite volatile from quarter to quarter, this means that estimating GDP growth based on expenditure indicators is really taking quite a punt.
The ONS recognises this – indeed, it's part of the reason it bases quarterly GDP profiles far more on the output side of the national accounts rather than the expenditure side – and so do most economists. Industrial production data are published monthly, albeit with more of a lag than other indicators. But given that this accounts for just 17% of GDP, survey data like those from the BCC and the Purchasing Managers' Indices (PMIs) get a lot of attention, because they report on the far larger private services sector. Unfortunately, the PMIs' performance, in terms of predicting GDP growth, has been a bit rubbish over the past three years, at least according to some.
For what it's worth, I think underlying growth won't have been that strong in the first quarter – so I am currently expecting the Q1 GDP figure to come in below +1%, rather than above it. Future data may well change my mind, but fundamentally I still don't see a strong driver of economic growth underpinning the UK economy this year. And with the bulk of the fiscal cuts still to bite – for all the noise and protest, the fiscal tightening in FY10/11 was just 1% of GDP, compared with almost 2Â½% expected in FY11/12 – the near-term outlook for growth really isn't rosy. That is part of the reason why the Coalition has been out talking up growth recently. But with no money in the kitty, it is hard to see what meaningful macroeconomic impact the Budget can have.