Sunday, January 30, 2011
Winter slip-up means a longer climb back for the economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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Before last week, economists thought a small increase in gross domestic product (GDP) for the fourth quarter of last year would be pretty bad news, opening the way to the danger of quarterly falls - the dreaded double-dip - during 2011.

Nobody expected a fall but that, as everybody knows, is what we got. GDP fell 0.5% and, while the fall was due to December’s bad weather, even without it the picture would only have been “flattish”.

Growth, in other words, petered out, even before the January Vat hike, April’s National Insurance increase and the coming big cuts. The statistician in charge of the numbers at Newport, Harry Duff, appears to have duffed up the recovery.

It would be easy to put these GDP figures into the file marked “Office of Nonsensical Statistics”. The reason nobody expected a fall in the fourth quarter was because business surveys, normally quite reliable, did not give any hint of it.

In a report for the monetary policy committee (MPC) earlier this month, the Bank of England’s 12 agents, its eyes and ears in the regions, noted the impact of the December snows on household spending but said non-consumer services and manufacturing were still growing. Treasury data showed tax revenues recovering well even as the nation was snowbound.

The National Institute of Economic and Social Research, which has built a reputation anticipating the official GDP figures using similar information to that available to the statisticians, predicted a 0.5% fourth quarter rise, not a fall. This was one reason why Martin Weale, its former director, now a member of the MPC, voted to hike interest rates earlier this month.

We know, as the ONS pointed out, that last week’s first draft of economic history will be revised over and over again in the coming months and years. The picture will change, for better - and it is usually for better - and sometimes for worse.

Let me, however, come to the defence of the statisticians this time. The official picture we have of recovery so far is plausible.

The economy took a while to get going after the worst recession in the post-war era and when it did, in the final quarter of 2009, it was with a modest, 0.5% rise. This dipped back to 0.3% in the first quarter of 2010, when bad weather and the return of Vat to 17.5% took the edge off the recovery.

The reversal of those weather effects and the delayed impact of Labour’s recession-fighting public sector capital spending produced a 1.1% rise in GDP in the second quarter. Some of this carried through to the third quarter, when there was a 0.7% increase in GDP. Then came the fourth quarter, of which more in a moment.

It is interesting to note that the Office for Budget Responsibility, the government’s independent forecaster, expected 1.2% growth for 2010 as a whole in its post-budget forecast in June, though revised that higher in November. The latest information suggests the economy grew by 1.4%, stronger than expected in the middle of the year, though we arrived at it via a more circuitous route.

So did the recovery peter out at the end of last year? Definitely not, in my view. Calculating weather effects is notoriously difficult, as the ONS admits, though it has gone to some effort to try to gauge them.

My rule of thumb method would be a simpler. A quarter consists of just over 90 days. If, in that period, you lost half a day’s economic activity as a result of the worst December weather for 100 years, GDP would be down by roughly 0.5%. If you lost a day’s activity, it would be down some 1%.

During December Heathrow, itself a small economy, closed for four days. Brent Cross closed on the Saturday before Christmas. Across the country, construction sites shut down early for the winter break, train services came to a halt and people stayed at home. Other ONS figures show sales of petrol fell by 4.6% between November and December.

So I do not find it implausible that the weather knocked the economy by 0.5%. I would not be surprised if the effect was larger, 1%. That would be in keeping with survey evidence, and point to underlying growth of 0.5% in the quarter, knocked down to minus 0.5% by the weather.

So the recovery is on track. Some economists are looking forward to a decent bounce-back in the current quarter, which was once expected to be weak, with growth of up to 1%.

That said, last week’s figures were still important. For one thing, they have added to nervousness about the economy, among business people and politicians.

For business, the risk is that a distorted figure becomes self-fulfilling, persuading firms to delay expansion and investment plans until things are clearer. Most business people seem prepared to look through the numbers and do what they were planning anyway but the danger is there.

For politicians, the figures sharpened the debate. The arrival of Ed Balls as shadow chancellor means the key political battleground in 2011 will be between him and George Osborne. Balls has had a dream introduction to his new job. Osborne has to demonstrate that he can win the debate against a stronger opponent and carry the coalition and the country with him through the tax hikes and spending cuts.

The GDP figures were also a useful reminder that, after the kind of recession we had, it will be a long climb back to normality. As things stand, the economy is 4.4% smaller than it was at the start of the recession nearly three years ago.

If the economy grows by 2% or so, it will take a couple of years, until the end of 2012 or early 2013, to get back to pre-recession levels. In between, there will have been a lost five years for the economy.

That climb gets a lot harder if you lose your footing, as appeared to have happened in the final three months of 2010. Even without that, it will be hard work.