Having been out of the country for a couple of weeks, I had hoped for a bit of peace and quiet on the home front, with no major downside news to react to. Needless to say, the -0.5% GDP figure for Q4 (-2% on an Americanised basis, which made it worse) did not fall into that category.
Whenever we get surprising results from official data, there is a tendency for some City economists to rubbish the figures. ‘ONS data are backward looking and get revised all the time’ is one of the usual refrains. However, while these are both valid points, there are a couple of other reasons why economists should probably keep their mouths shut – or, even better, hold up their hands and admit they got it wrong. (I got it wrong, by the way.)
First, while GDP data are revised lots, this does not mean the data are necessarily rubbish. The ONS compiles data from a wide range of sources, some of which only become available over time. As this new information arrives, and is included in the estimates, the ONS should and do change their figures. Furthermore, while this kind of uncertainty will always surround GDP data, the ONS have actually done a better job in recent years in terms of reducing the bias in early estimates of GDP. It used to be the case that first estimates of quarterly growth were revised up by 0.2pp, on average. Due to the ONS’s improvement, that bias is barely evident now.
Second, even abstracting from the impact of the snow – which the ONS thinks can account for all of the 0.5% decline – GDP was still ‘flattish’ in the fourth quarter. That was below the full range of economists’ forecasts, leaving all of them with egg on their face. My heart went out, in particular, to George Buckley from Deutche, who was on the BBC on the morning of the release confidently proclaiming growth of 0.6%. We got it wrong, ladies and gents. It’s as simple as that.
However, it was only when I got back to the UK that I spotted the real shock from that week’s data releases. True, the GDP figure was a surprise – but the snow has now melted, and activity looks to have recovered in the first quarter. If GDP does bounce back pretty firmly in Q1, as seems likely, the snow will have had no impact on either monetary or fiscal policy. And, with that in mind, Martin Weale’s decision to vote for a rate rise in January was far more of a surprise.
Weale is a slightly odd one to read. I first met him many years ago, and the lasting impression that I had was of a very intelligent chap, who was also (unusually for economists) quite personable. As the head of the National Institution for Economic and Social Research (NIESR), he did a good job of promoting its research and getting its message out there. His pronouncements on policy also seemed to be very measured and sensible, making him a solid choice for the MPC.
However, his decision to vote for a rate rise in January was completely unexpected. If anything, Weale’s comments last autumn had seemed rather on the dovish side of the debate, suggesting he would hold off from voting for a hike. And someone of his experience will know that inflation is set to fall back in 2012 (unless we get another hike in VAT). Instead, it looks like the continued spectre of above-target inflation has persuaded Weale that a quick rise in rates now will head off any nascent inflationary pressures in the labour market. Mervyn King thinks that these pressures are pretty non-existent, judging from his recent speech – but Weale is not prepared to wait.
Regardless of the rights and wrongs of policy, however, Weale’s move is likely to end up having more impact on the economy than the snow (which has now melted, of course). It would only take three other MPC members to get nervous for us to see a rate hike – and with the hawkish Dale still lurking in the wings, in practice probably only two. Much will depend on the two Pauls – Fisher and Tucker – who emphasise the need not to surprise the market. With that in mind, on balance I don’t think the MPC will raise rates this month. But the odds of a hike sooner, rather than later, have shortened significantly.