Don’t believe the GDP hype
24 January 2012
You can safely expect to hear a lot about the economy tomorrow, as we get a first estimate of whether the economy grew or shrunk during the last three months of 2011. There is a lot riding on these numbers, both for politicians and for those seeking signs of a turnaround in the dismal economic climate. These are the first growth figures to be released since the Office for Budget Responsibility revised its forecasts for government borrowing in November, and along with today’s revelation that the government’s debt now tops £1 trillion, this gives them an extra political edge.
Getting the UK economy growing again is not only vital for jobs and incomes, it is also central to the government’s deficit reduction plan. If tomorrow’s figures suggest that the economy shrank in the run up to Christmas, the government’s plan is likely to come under scrutiny once again. At the same time, a decent growth figure – say 0.5% – is sure to be seized on as evidence that the UK economy has finally turned a corner. But it would be a mistake to read too much into one number – this is only a preliminary estimate of GDP after all – although such caution is unlikely to influence many newspaper editorials.
So what can we expect from tomorrow’s figures? In truth, it is very hard to tell – many of the main leading indicators offer a conflicting view of the economy. On the one hand, the Indices of Services (for October) and Production (for November) showed a sharp slowdown in output. The labour market has taken a sharp turn for the worse, with unemployment having begun to rise again in recent months.
But there are also some grounds for optimism. The latest PMI (Purchasing Managers Index) figures show the service sector (which makes up most of the economy) growing strongly in December, with the manufacturing sector declining only slightly. Retail sales were also strong in the pre-Christmas period, growing by 0.6% compared to last year.
It looks as if the economy suffered badly in October, but picked up slightly in November and December, buoyed by Christmas trading. On balance, that will probably leave growth in the final quarter of the year at around zero, although there is plenty of scope for a surprise either way. That is a reasonable reflection of how the UK economy will look in 2012 – probably stagnant, but with a great deal of uncertainty.
These indicators also tell us something more pressing about the shape and direction of our economy. Broadly speaking, manufacturing is struggling, and services are holding up the economy. That is not the way it was supposed to be. The UK’s hopes of a sustainable economic recovery were pinned on an export-led renaissance in the manufacturing sector, with the service sector held back by high levels of consumer debt and falling government spending. The opposite is happening.
It is possible that the more advanced parts of the UK’s service industries may drive an export-led recovery, but there are few signs of this happening so far. Britain’s trade deficit has improved slightly in the last couple of months, but there are no signs yet of an export boom. With most of our biggest export markets also experiencing slow growth, this is perhaps no surprise.
Whatever the GDP figures do show tomorrow, we should not react too strongly. The UK economy remains in a precarious position, but it is far from down and out. The economy did not really begin the long process of recovery and re-balancing in 2011. If we want to start that process in 2012, the government must focus on boosting exports and business confidence. That requires sustained, coordinated work, not a knee-jerk response to one set of figures.
We will be commenting tomorrow on what the GDP figures tell us in the short term, but at the same time we will be working on what the Chancellor can do in March’s Budget to set the UK back onto a healthy long-term trajectory.