The past week has seen a mix of gloom and optimism around the UK economy, as is often the case when different data or releases head in different directions. But what was slightly unusual this time around was the stark juxtaposition between two very different news stories.
Friday morning, the National Institute for Economic and Social Research (NIESR) published its latest forecasts for the UK and World economies. NIESR thinks that the economy will shrink slightly in 2012, and urged the government to temporarily ease spending cuts to provide some fillip to activity. Its forecast of a return to technical recession in the first half of 2012, given that GDP growth in Q4 was negative, implies that it expects growth in Q1 (and maybe Q2) to be negative as well.
One issue here is that there are often lags in the forecasting process. A friend who used to work at the Bank of England has pointed out that the forecast there was largely finalised on the Friday before its publication on the following Wednesday. In that time, things can sometimes change – most notably financial market or commodity prices, which can move sharply in a matter of minutes. In NIESR’s case, I expect the forecast was finalised around Tuesday or Wednesday, to give them time to print and publish the final report and figures.
The problem is, in the meantime the data started to go the other way. Last week I pointed out that a double-dip recession in the UK was far from inevitable, and the economic news this week chimes very much with that. Admittedly the news came in the form of the latest Purchasing Managers’ Indices (PMIs), which haven’t always been the best guide to activity. But the jump in the manufacturing PMI on Wednesday and particularly the services PMI today are consistent with growth very much coming back in the first quarter, rather than a further decline in national income.
To be fair to them, NIESR had to close their forecast a couple of days before they published it just to get the logistics right. And, ultimately, their forecast could still come true – the PMIs are far from perfect, and we are only one month through the first quarter. But the juxtaposition of a very gloomy ‘return to recession’ headline right next to a ‘service sector bounces back’ this morning struck me as particularly amusing. Sometimes, economics really is a mug’s game.