UK’s growth profile is likely to remain bumpy for at least the next two quarters - ITEM Club comments on today's GDP figures

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s GDP figures:

  • On the whole the revisions to GDP are disappointing, with the economy 0.2 percentage points smaller than previously thought
  • Consumer squeeze remains intense but should ease if oil prices fall
  • UK’s growth profile is likely to remain bumpy for at least the next two quarters

“Although some of the damage of the downward revision to Q4 GDP growth is offset by an upgrade to Q3, we are still looking at a level of output that is 0.2 percentage points lower in Q4 than we had previously thought.
 
“In general the expenditure breakdown for Q4 looks less discouraging than before, with the decline in business investment having almost halved and much less of a reliance on the public sector. The smaller contribution from net trade is also disappointing, but the previous figures had always looked a little strong given what had been happening in the Eurozone.
 
“The extent to which consumers are being squeezed is demonstrated by a third successive quarterly decline in real incomes and the fact that 2011 as a whole was the worst year for household finances since 1977. Consumers managed to increase their spending in Q4 but this appears solely to be a story of aggressive discounting and the recent retail sales figures suggest that this effect is already beginning to fade away. We are optimistic that the squeeze on real incomes will reverse throughout 2012, but it is very much dependent on the oil price moving back and that remains a great source of uncertainty. Even if this does happen, the consumer recovery is likely to be protracted, given the backdrop of rising unemployment and the pressures to deleverage.
 
“We expect the Q4 decline in GDP to be reversed in Q1, with modest growth of around 0.3%, but it is unlikely to mark the beginning of a strong pickup. As the Governor remarked yesterday, we are more than likely to see another decline in Q2 because of the extra Bank Holiday. After today’s revisions, the past five quarters have seen three declines in GDP and two quarters of growth – this zig-zag pattern is likely to continue for another couple of quarters at least.”