Devil's in the detail with today's GDP revisions – economy still badly out of shape
Authors: Andrew Sissons
27 September 2012
The headline from today’s GDP statistics – that the contraction in Q2 has been revised from 0.5% to 0.4% - is about the least interesting statistic in there. Today’s release, the Quarterly National Accounts, is packed full of numbers that give us a clue about how and why the UK economy is shrinking. Whereas the first estimate of GDP (which attracts most of the media coverage) is accompanied with so little data that most economists are left to make up explanations for why the economy performed as it did, the second release comes with enough figures to make your head spin.
And the signs from the background data are not encouraging. The economy’s contraction between April and June was largely driven by falls in investment and net trade, the two very drivers that are supposed to drive recovery and rebalancing. Spending by households and governments is also falling, but this drop is both less dramatic and less surprising. By way of contrast, the contraction in Q1 was driven largely by a fall in inventories – businesses massively reduced their stocks of goods, presumably in anticipation of a downturn in the economy (probably induced by the Eurozone crisis). The contraction has set in this time around, with spending falling in all areas.
Of these, the trade problem is most pressing. Our exports fell by 1.1% in Q2, while imports increased by 1.4%, leaving our trade deficit well over £6 billion in three months. This is a relapse after strong progress on our trade position during 2011, and is the single biggest drag on growth in Q2. Some commentators have put the contraction in GDP down to the Jubilee Bank Holiday (which may be partly true), but it is hard to explain why this would drive a big rise in imports. The implications of this are stark; with domestic spending under pressure, the UK economy has few options but to look overseas for demand, and a failure to close the trade gap will ultimately mean a failure to grow.
The investment problem is more nuanced, though. Business investment actually increased slightly in Q2, while the government’s cuts in public investment do not show up in these figures. In fact, most of the fall in investment came from private households, investing significantly less in housing and cars. That makes the drop in investment slightly less concerning, but raises a few questions about consumer confidence.
This drop in net trade and investment shows up in the industrial distribution of the recession. The production industries (including manufacturing) and construction have seen the biggest drops in output. For construction, this can probably be assigned to the big fall in household investment. For manufacturing and other production, which tend to be more export-intensive industries, the trade problems are probably the biggest trigger.
What, then, of the outlook for the next six months or so? There is one source of encouragement in these figures: disposable incomes (ie. Income after tax) rose by almost 2% in Q2, the first big rise since 2009. This increase probably reflects a mix of strong employment growth and tax changes in the Budget, and suggests that the squeeze on consumers could finally be easing. But there are two serious notes of caution here. First, this rise was accompanied by a rise in the savings rate; households have significant debts to pay down (deleveraging in economics-speak) and may use extra cash to do this rather than spend. Second, UK consumers have a habit of spending extra money on imports, as our research on consumer habits showed. If a rise in incomes only serves to worsen the trade balance, the prospects for recovery will become more remote.
All of these figures serve to highlight one thing: the UK economy is still badly out of shape. We need to re-orient more of our economy towards exports (especially to the emerging world), stimulate investment, and promote the type of explosive innovation that can jolt the economy into life.
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