GDP figures worse than expected, while last week’s snow also rings alarm bells for 2013Q1 - EY ITEM Club

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

  • GDP at the lower end of expectations – construction was particularly disappointing
  • The figures look worse than they really are – base effects and the collapse in oil output are big factors in the fall
  • Q1 may be weak because of the snow, but momentum should build thereafter

“Today’s GDP figures are right at the lower end of our expectations. The manufacturing and services figures came in pretty much where we expected them to but the construction outturn is very disappointing in the context of the monthly data that has already been published. Construction output must have collapsed in December to get such a small boost over the quarter as a whole.

“The extraction sector also continues to exert a major drag. Where oil production was once a major support to UK activity, the sector is declining rapidly and the Q4 collapse means that output has now fallen by almost 40% over the past five years. This is having a significant impact on the GDP figures – the excluding oil measure is just over 2% short of previous peaks, in contrast to the 3.5% shortfall for GDP.
“In reality the quarterly growth rate does look worse than it really is. As well as the oil issue, the level of GDP in Q3 was inflated by the inclusion of the revenues from the ticket sales and TV rights from the Olympics and Paralympics boosted GDP. Accounting for that, you are left with an economy that is pretty much flat, as it has been for much of the past year when these one-off factors are stripped out.
“Last week’s snow also rings alarm bells about 2013Q1. Hopefully the fact that the disruption has come early in the quarter, in contrast to previous episodes, means there is more scope to catch up this time around. But the chances of another negative quarter – and a technical recession – are relatively high.
“That said, we are more optimistic about prospects further out. Encouragement can be drawn from the nascent recoveries in consumer spending and business investment, while the external outlook is also beginning to improve, particularly in the US and emergers. We still think that growth of close to 1% is achievable for 2013 as a whole. And even stronger outturns could be possible were fiscal and monetary policy more supportive.”