UK GDP Comes At Huge Miss To Expectations As Weather Is Blamed, "Inflationary Surge" Causing Big Head Scratching
The UK department of economic "truth, statistics and everything else" sure has learned a thing or two from America. Such as blaming snow for appearing in December. As BLSy as it may sound, it is precisely this that the surprising collapse of the UK economy in Q4 has been blamed on. Per Bloomberg: "Britain’s economy unexpectedly
shrank the most in more than a year in the fourth quarter as
construction slumped and the coldest December in a century
hampered services and retailing." What? They don't have a seasonal adjustment for "cold" winters? How quaint. "Gross domestic product fell 0.5 percent after increasing 0.7 percent in the previous quarter, the Office for National Statistics said in London today. Growth would have been “flattish” without the impact of the weather, it said. The median forecast in a Bloomberg News survey of 33 economists was for an increase of 0.5 percent." And even more shockingly, the GBP fell after the market was shocked, shocked, that the insolvent European continent may just be a little ahead of itself with expectations of interest rate hikes: "The pound dropped after the report, which shows the U.K. recovery faded even before Prime Minister David Cameron’s government increased sales tax to 20 percent this month, which may damp consumer demand this year. The data may reinforce calls for the Bank of England to hold off increasing its key interest rate to curb inflation." But how will the UK halt what Posen last week called a "temporary surge" in inflation. Does this actually mean that, gasp, surging inflation, temporary or otherwise, is occurring even in very developed countries that suddenly appear to have massive economic slack. But... didn't the.... Chairman.... no, it can't be. He was 100% confident.
More pure comedy from Bloomberg:
“The economy is underheating, not overheating,” Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official, said in a phone interview. “An interest-rate increase would easily push the economy back into recession and would be a major policy error.”
The pound fell as much as 0.9 percent against the dollar after the data and was at $1.5790 as of 11:12 a.m. in London. It was down 1.2 percent since yesterday, the most since Dec. 15. U.K. 10-year gilts rose, with the yield falling to 3.58 percent.
The GDP drop is the biggest since the second quarter of 2009, when it fell 0.8 percent. The statistics office said the data is “more liable to revision than usual.” None of the economists in the survey forecast stagnation or contraction. From a year earlier, the economy expanded 1.7 percent.
While these are “obviously disappointing numbers, there is “no question of changing” the fiscal plan, U.K. Chancellor of the Exchequer George Osborne said. “We will not be blown off course by bad weather.”
His opposition counterpart Ed Balls said in a statement that the figures were a “matter of great concern.”
“George Osborne and the Treasury must urgently re-think their reckless plan to cut the deficit too far and too fast and start putting growth and jobs first,” Balls said.
And this is how the Goldman court jesters spun the extremely disappointing data:
Far weaker than expected (GS, NIESR 0.4%, consensus 0.5%) despite the fact that most of the hard information on which the ONS bases its estimate was (as is always the case) in the public domain.
What private information the statisticians do have - partial returns for December for manufacturing, construction and some service sectors - must have indicated a severe drop in output in that month, particularly in the sectors that are vulnerable to bad weather. As a result - and these estimates are highly prone to revision, as more information comes in - the ONS is allowing for monthly declines between November and December of 2.4% in hotels and restaurants, 2.7% in transport and communication, 4.5% in non-retail distribution (motor dealerships and wholesale distribution) and 11% (nsa) in construction output. Hotels and restaurants account for just under 3% of aggregate GDP, the others 6% each. So these declines are worth -1.2% pts to aggregate output growth in December alone and 0.4% pts off the quarterly number.
What the impact of the weather has been would be hard to judge even assuming these numbers are correct. Some of the decline in construction reflects not weather but cuts in public-sector orders (we'd allowed for a decline of 1.3%qoq in construction output). The largest quoted sector, "business and financial services", accounting for 30% of the economy (NOTE: only around a quarter of this is financial services) is also assumed to have contracted by 1.4%mom in December, but it's difficult to know how vulnerable these sectors were (perhaps people simply failed to come into work, something we'll find out in the average hours worked release for December, due in a couple of months). Poor weather probably had some impact on retail spending and output (not in that 0.4% pts figure above) and maybe in oil or government services too.
What we can say is this: (i) in aggregate, non-oil private-sector GDP contracted at a 2% rate in Q4 on these preliminary estimates but the surveys for the quarter - even allowing for weather (remember the weak services PMI in December) - were consistent with something around +3%qoq annualised (see the graph). There are good reasons to think that surveys are less useful at extremes, including the severe recession in 2008/09, but this gap - worth 0.9%pts off non-annualised aggregate GDP growth - looks like something more exceptional (weather or just the usual measurement error) and, one suspects, something temporary; (ii) if it is then we should pencil in either an upward revision to this number &/or a significant rebound in GDP in Q1 - in the region of 1%qoq perhaps; (iii) by the same token, the MPC will no more want to react to a temporary hit to output than it would to a temporary, energy and VAT-driven rise in CPI inflation. Mervyn King may well see this as a useful number to remind people of the economy's fragility and to justify the MPC's failure to raise rates in the face of high spot inflation. But it's not clear he needs to. We share the MPC's view that inflation will fall back to around its 2% target (our central forecast has slightly less than 2%) in early 2012 and GDP growth is likely to rebound sharply in 2011Q1. We continue to expect no change in policy, in either direciton, until late 2011.
Oh well. Not even Goldman could spin this disaster. Which incidentally is coming soon to a US near you.
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