The big piece of economic news in the UK over the past couple of weeks was undoubtedly the publication of the GDP data for the first three months of 2011. After much huffing and puffing, the data came out broadly in line with market expectations, showing that the economy grew by 0.5% in the first quarter.
At face value, 0.5% sounds ok – it's pretty close to trend growth of 0.6% a quarter. But, as I pointed out before the release, the Q1 data followed the surprise contraction in national income at the end of 2010. The ONS still thinks that contraction reflected the snowdrifts in December, and that underlying economic activity was broadly flat – and, as the snow has now melted, we should have expected a bounce of around 0.5% in the first quarter even if nothing else happened.
The fact that 0.5% is all that we saw means that snow-adjusted economic activity was also broadly flat between January and March – or, as one politician put it, the economy has been standing still for six months. I rarely agree with politicians, but in this instance that statement is pretty much spot on: the UK economy has been much weaker over the past six months than economists and policy-makers forecast.
With the pace of fiscal tightening set to ratchet up in this financial year, this recent weakness has led to renewed questions about the economic outlook. There were already fears that the Bank of England and Office for Budget Responsibility were being too optimistic about growth in two and three years’ time. But it is also possible that forecasts for 2011 may be too bullish as well. Leaving aside the snow-bounce in Q1, is there any genuine momentum in the private sector?
To my mind, there may be a bit more momentum than some of the doom-sayers think. One of the reasons that GDP growth was only 0.5% in Q1 – or that snow-adjusted GDP was flat – was that the construction sector saw another big fall in output. Although construction only accounts for 6% of GDP, the 4.7% fall in output in Q1 meant that the sector knocked 0.3 percentage points (ppts) off growth. That 4.7% fall was smaller than the (admittedly volatile) monthly data suggested, but was still something of a surprise following the 2.3% contraction in 2010 Q4, which we thought reflected the snow. But, with new orders having picked up more recently, there are signs that the recovery in construction may just have been delayed, rather than written off altogether. I would not be surprised if we saw robust construction growth in a couple of quarters during the rest of 2011.
Leaving aside construction, energy (which is volatile and partly temperature-driven), agriculture (which is titchy) and public services, the rest of the economy did actually manage to grow over the past six months. Together, manufacturing (13% of GDP) and private services (around 53%) grew by 1% in Q1, after a fall of 0.5% in Q4. Smoothing through these two quarters gives an underlying average growth rate of about 0.3% a quarter – still weak, for sure, but far better than nothing at all. Encouragingly, there are also one or two other signs that the service sector may be picking up, meaning that manufacturing will not have to drive the recovery all on its own.
The bottom line, then, is that the UK economy has been weaker than expected over the past six months – but there is still some underlying momentum. Admittedly, that momentum is less than we would like, and will probably persuade the majority of the MPC to leave rates on hold tomorrow. And with rebalancing yet to really take hold, the coming fiscal tightening still poses big risks. But I, for one, am not yet convinced that we will see a genuine double dip this year.