Thursday, October 06, 2011
GDP and the Bank
Posted by David Smith at 07:30 AM
Category: Thoughts and responses

The quarterly national accounts, produced yesterday by the Office for National Statistics, are a challenge for the government and - on the face of it - an incitement to action by the Bank of England. Growth of just 0.4% in the first quarter and 0.1% in the second (down from 0.5% and 0.1% respectively) leave growth over the latest nine months flat.

The new GDP figures, here, are indeed interesting. Against expectations that the ONS would revise down the peak-to-trough fall in GDP, it has increased it, to 7.1% from 6.4%.

The recession started before Lehman Brothers and did so aggressively, with GDP now estimated to have fallen sharply in the second quarter of 2008, and for 2008 as a whole. This is a very different picture to the one policymakers had at the time. One crumb of comfort is that the economy pulled out of recession in the third quarter of 2009, as many of us said it did at the time.

What about the latest data? We still have a picture in whiich most of the economy grew pretty well in the first quarter, with services up by 0.7% and manufacturing 1.1%, before slowing in the second to 0.2% in each case. In both quarters energy dragged down the overall GDP rise, while in the first weak construction and in the second the additional bank holiday were depressing factors.

What should be the Bank's response? There are plenty of reasons why the Bank might want to do more (there's speculation about a rate cut even though this appeared to be rejected last month) and quantitative easing will be on the agenda. But, while there may be reasons to do this, the GDP figures should not be among them. The Bank did not believe the recent data before and will believe them less now.