Substantial upward revisions to GDP remain likely, but they will take time to come through - ITEM Club

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

  • Revisions are consistent with earlier production and construction release
  • Investment slump is a worrying sign and is likely to reflect renewed Eurozone troubles
  • Substantial upward revisions remain likely…but they will take some time to come through

“These revisions were bang in line with what we had expected given the upgrades to production and construction output announced a couple of weeks ago. We still expect a substantial rebound in Q3 as the impact of the extra bank holiday in Q2 unwinds and, with a minor boost likely to come from hosting the Olympics as well, we should see growth more than offset any losses in Q2.

“As with recent data releases there are some real oddities in the detail, which undermines our confidence in the quality of the figures. The unusually large swings in stockbuilding and net trade are pretty striking and it’s not clear why the extra bank holiday should have caused any particular issues in these areas. However, one genuine cause for concern is the steep drop in investment. We appear to be seeing a repeat of last autumn, with the escalation of the Eurozone crisis damaging business confidence and leading firms to postpone investment plans.

“Assuming that the extra bank holiday reduced quarterly growth by around 0.5% we’re looking at underlying growth being flat. This actually represents an improvement on the previous two quarters, but is still considerably weaker than most other indicators, in particular the labour market data. It’s fair to say that we are still extremely sceptical about the picture that the GDP data is painting. The release of a paper on the productivity puzzle alongside today’s GDP figures is a belated acknowledgement that there are problems with the various data sources, but the paper itself sheds little light on the debate and is, in effect, just another robust defence of its GDP estimates.

“We’ve been in this position of having puzzlingly weak GDP data several times before, most recently in 2009, and history tells us that we shouldn’t be surprised if we see this data revised in the future. Although it may take several years before these revisions have fully worked through.”