Sunday, April 08, 2012
Growth figures become a national lottery
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

lottery.bmp

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Sometimes, and not just to get another reference to Charles “bicentenary” Dickens into the column, I feel Britain resembles a tale of two economies.

I am not talking here about north versus south, or the City versus manufacturing. Rather, it is the very different picture presented by the official data, from the Office for National Statistics, and private surveys of economic activity.

The difference is not always one way. Retailers have often been left scratching their heads by the buoyancy of the official data for high street sales.

Mostly, however, gloomy official numbers have been at odds with much more buoyant surveys. Why is this, and what is really happening to the economy?

Let me take you back 10 days to the latest update from when the Paris-based Organisation for Economic Co-operation and Development (OECD). The headline-grabber was a prediction of a 0.1% drop in Britain’s gross domestic product (GDP) in the first quarter, following a 0.3% drop in the final three months of 2011.

It is probably the most arbitrary definition in economics, and one we should not really take too seriously, but every schoolboy knows that two consecutive quarters of decline equals a recession.

No matter that it was a forecast from the OECD, which does not have a great forecasting record, it spawned many “Britain back in recession” headlines. Then, however, something surprising happened.

The OECD’s pronouncement, rather than sparking deep gloom, was followed by a series of upbeat surveys on the economy. They included the monthly purchasing managers’ surveys, produced by Markit, for manufacturing, construction and services.

After the last of these was published, showing the service sector expanding strongly, Chris Williamson, Markit’s chief economist, declared that “UK economic growth picked up in March to round off the strongest quarter for a year”.

The three Markit surveys, indeed, were consistent with 0.5% growth in the first quarter. It may not sound much but it is a far cry, economially and politically, from the OECD’s 0.1% drop. The fact that in all three cases the March surveys showed growth strengthening through the quarter boded well for activity in the second quarter (which has just started) too.

It was not just the purchasing managers’ surveys. On the back of the British Chambers of Commerce’s latest quarterly survey, David Kern, its chief economist, prodicted 0.3% first quarter growth.

The BCC, which surveyed manufacturing and services in a sample of 8,000 firms, found both sectors were more upbeat and reporting stronger output, orders and employment. Manufacturing was stronger, suggesting Britain’s factories are shrugging off eurozone gloom and weak demand at home to take advantage of export opportunities further afield.

The surveys may not exactly have been a champagne moment but they were a welcome antidote to the gloom. Andrew Sentance, the former Bank of England monetary policy committee member, now with Price Waterhouse Coopers, kept a running score which reached OECD 0 Surveys 6.

Then, as is its wont, the Office for National Statistics, threw an almighty spanner into the works on Maundy Thursday. From its Newport lair, it published figures showing industry back in the doldrums. Its numbers are less timely than the surveys, so covered February, slap bang in the middle of the first quarter.

In that month, it said, manufacturing output fell by 1%, dropping below any month in 2011, and was 2.3% down on February 2011. Overall industrial production rose 0.4% thanks to a cold-weather boost to energy output. But it was 2.3% lower than a year earlier. Recovery, what recovery?

There was nothing in the surveys to suggest the weakest manufacturing numbers in over a year. Kern of the BCC said the numbers raised “serious questions” about the official data. I tend to agree.

The purchasing managers’ survey for construction has been growing since January last year and in March reported its fastest rate of expansion for 21 months.

Now consider the horror story unfolding in official construction numbers. They suggest output fell off a cliff in December and January (23% combined), so even a sprightly recovery in February and March may not stop the sector reducing GDP in the first quarter. Given industrial production is also likely to be negative, all the weight is on the shoulders of the service sector. After conceding a hatful of goals, the OECD could yet turn out to be right.

I can tell you at this point the official figures will be wrong. This is despite the ONS telling me all its statistics are produced using internationally recognised methods.

I know they will be wrong because a former national statistician, Len Cook, explained why in a paper a few years ago. Revisions to official data are “expected and inevitable”, he said. The ONS gets its figures out as soon as it can, knowing further information will change the picture.

Even “final” estimates of economic data can never be regarded as the truth because there will always be an element of statistical uncertainty in them. I know, from conversations with him, he was keen to attach reliability “star” ratings to official statistics, though it never happened.

Why do the surveys often appear to present a more realistic picture than official data? The ONS, despite the resources at its disposal, produces numbers that may be statistically pure - on the basis of the information available - but often jar.

The surveys, in contrast, build up a broader, internally consistent picture of business activity by asking a series of questions, covering orders, employment, investment intentions and the rest. Of course we need both official data and surveys. But we should acknowledge the limitations of the former and the usefulness of the latter.

The big picture looking at data and surveys in the round, is an economy growing at a modest rate which has been doing so for nearly three years. An economy that was “flatlining” as Labour keeps saying, would not have added nearly 700,000 private sector jobs in the past two years.

That picture of modest growth is true now, and will still be true whatever surprises the ONS has for us when it publishes its initial estimate of first quarter GDP on April 25. The challenge, as discussed last week, is to achieve stronger growth.