Wednesday, January 25, 2012
GDP slips. but no big deal
Posted by David Smith at 11:15 AM
Category: Thoughts and responses

The 0.2% drop in gross domestic product inn the fourth quarter of 2011 was disappointing, but probably no more than that. It did not change estimates for growth in 2011 of 0.9% (1.4% excluding North Sea oil and gas) and was broadly in line with expectations.

The service sector was flat in the fourth quarter, which looks to be a number likely to be revised upwards looking at the surveys, while industrial production was down by 1.2%. Included in this was a huge quarterly fall, 4.1%, in electricity and gas supply, reflecting the mild weather.

Given this, the possible effects of the November 30 public sector strike and the likely upward revision of these figures when more data comes in, we should not worry too much about these figures, which are here.

This is particularly the case when you look at an upbeat CBI manufacturing survey, the highlight of which was: "In the next three months, manufacturers expect output to rise modestly, with a balance of +15%." If manufacturing avoids a drop in the first quarter of 2012, so will the wider economy.

The Bank of England's minutes showed a unanimous vote in favour of unchanged policy, and an interesting debate:

"For some members, the risks of undershooting the target meant that a further expansion of asset purchases was likely to be required. Some of those members also noted a downside risk to inflation arising from the possibility that the reduction in the economy’s supply potential following the recession had been less, and hence spare capacity greater, than assumed in the Inflation Report. But there was no compelling need to increase the scale of the programme of asset purchases before completing those already announced.

"For other members, the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term. Annualised three-month inflation rates were still above the target. Looking ahead, particular concerns included: the risk of price pressures from firms seeking to increase margins; and the fact that even if wage growth were to remain subdued, wages might add to inflationary pressures if productivity growth were also weak."

More QE is likely in February but by no means guaranteed. The minutes are here.