UK GDP Comes At Huge Miss To Expectations As Weather Is Blamed, "Inflationary Surge" Causing Big Head Scratching

Tyler Durden's picture

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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kaiten's picture

Stagflation, bitchez!!!

BigJim's picture

To be fair... I live in the UK, and the place really does shut down after a few millimeters of snow.

e1618978's picture

Best get used to it - when the gulf stream stops you will have an average -10 C temparature in Janruary.

egdeh orez's picture

Pfft.  WTF?!?!  UK doesn't have a department of truth?  Losers!

Ferg .'s picture

You can bet the BOE doves are banging their heads after that reading .  High inflation and growth contraction , the last combination they wanted to see .

Alcoholic Native American's picture

Your climate sucks bitches.

OMG's picture

Need more chemtrails

Racer's picture

Growth would have been flattish if it weren't for the weather?

HA, like there would be no inflation if it wasn't for all the things that are soaring in price!

as for "underheating" um, that is cooling, slowing down, not 'underheating'


EscapeKey's picture

The BoE have excused above-target inflation for 18 months in a row by "temporary issues". Seriously. It's one big fat lie after another.

SheepDog-One's picture

Exactly, this is like the Twilight Zone where we're now supposed to be shocked that 24 months of balls to the wall bailouts of everything and trillions printed monetization has resulted in crappy economic conditions? Was anyone here during Paulsons threats of an economic total collapse and martial law actually believing his plan for 0% monetization and a blank check book an actual solution to anything except continued world bankster theft of the worlds wealth? WTF can you say except WTF??

Yea, Im not confused at all! I said 24 months ago this insanity would lead to total collapse!

shortus cynicus's picture

Sell it to All Gore - "Global Undercooling".

Josephine29's picture

These figures are a concern and came as something of a shock in the UK.However whilst they are worrying I notice that with his usual calm thougtful attitude notayesmanseconomics points this out.

Another potentially ameliorating point is the fact that if we look further back into 2010 we saw “upward surprises” to growth in the second and third quarters. The numbers then were unexpectedly strong being initially reported at 1.2% and 0.8% respectively. I wonder if some of the growth unexpectedly reported then has dropped out of the figures in some way giving us a surprise in the reverse direction.


So he thinks that if you look at the year as a whole there are questions about the numbers for several of the quarters and this poses as much a problem for the Office of National Statistics as it does for the UK economy.For those who blindly follow the numbers he also points out.

I feel compelled to point out that I have often argued that these numbers can be unreliable and we never actually ever know that they are correct.

EconSammie's picture

I think that some very valid points are made by the analysis that you quote. Having read the article I see that he also thinks that we should allow for the fact that manufacturing and industrial production has been strong. So as ever the picture is muddy but we should be careful of lurching from euphoria to despair as he points out.

Die Weiße Rose's picture

well, do something....

get Bob Geldorf to do some farm Aid or something..


topcallingtroll's picture

This is why sentiment is shifting the usa. The ossified, eurosclerotic socialist paradises are in aggregate more over leveraged in their banking systems also. We will find out in the next ten years if all those people praising socialist europe are correct or not. Incentives to work and produce are important. Misallocations of capital are important.

SheepDog-One's picture

'Sentiment shifting back to the US', ground zero for all these disasters in the first place? What kind of moron bought into the idea you can ZIRP trillions most of which simply sits in world banksters vaults while the middle class is blown out and it would have any positive effect at all EXCEPT for the bankster overlords? Get real!

Mercury's picture

Does weather ever get credit for quarterly earnings upside surprises?

Sabremesh's picture

Occasionally, a British summer will enjoy a couple of days of uninterrupted sunshine, at which point sales of ice creams on sticks "go through the roof", adding at least 0.0000001% to GDP. Happy days.

gwar5's picture

Biflation. Don't ask, don't tell.

Cdad's picture

What? They don't have a seasonal adjustment for "cold" winters? How quaint.

LOL!  LOLOLOLOL!  Com'mon is awfully early here, and the neighbors are probably starting to wonder about all the laughter coming out of my apartment from the closet where I am hiding under all of my winter coats.  Seriously, man...maybe you could hold off on the chuckles until 9ish?

SheepDog-One's picture

Cdad it seems this morning we've crossed over into the Twilight Zone, where even the 'intelligent' people are baffled as to why 24 months of totaly insane printing of trillions at 0% in a whackjob idea to paper over the latest mega bubble theft ring has caused 'head scratching economic problems' around the world! 

LeBalance's picture

Or rather:

"Gee, Sirrah, I wonder if we can get away with telling them this fat lie once again."

"Exactly how many times can we subdivide their consciousness with even more dissonance creating fibs until their cerebral cortices approximate the computing mass of jello?"

nevadan's picture

...Prime Minister David Cameron’s government increased sales tax to 20 percent this month, which may damp consumer demand this year.

Ya think?

Dismal Scientist's picture

From 17.5% to 20%, and its not applicable to food anyway. This is not the major problem. Lack of employment and a whopping debt burden, plus owning too many US Treasuries is more the issue.

ak_khanna's picture

The population in the developed world are suffering due to the hangover from excessive borrowings from lenders who lent to anyone on the street to maximise their own bonuses.

The problems have been compounded by Outsourcin­­­­­­­­g and Rampant Speculatio­­­­­­­­n allowed in all the exchanges. The problems are hereto stay as till date no one in the political arena has even acknowledg­­­­­­­­ed the problems let alone find solution to them.

The politician­­­­­s around the world are nothing more than auction items which can be sold to the highest bidder. They will do whatever they can for the lobbyist paying them the maximum amount of money or votes, be it the unions, the banksters, the richest corporatio­­­­­ns or individual­­­­­s. They are in the power seat to extract maximum advantage for themselves in the small time frame they occupy the seat of power.

The rest of the population is least of their concerns. The only activity they do is pacify the majority of the population using false statistics and promises of a better future so that they do not lynch them and their masters while they are robbing the taxpayers.

Racer's picture

And how about the fact that the people cannot afford the massive price of petrol for their cars (now at record high around 133p a Litre!!!!) and fuel to heat their homes because of the cold weather after yet  more tax rises? Add that the higher costs of food and it is no wonder the people don't spend... they can't afford it

BigJim's picture

Hey you! Someone has to pay for our Brave Boys fighting to save Democracy! And our noble bureaucrats to help 'create' jobs in politically favoured sectors. And pay for an entire class of workshy scroungers to dine at the taxpayers' expense.

Shut up and get back to work. What are you - some kind of right-wing, anarcho, neo-con, libertarian commie?

Dismal Scientist's picture

Yes, the UK economy is the opposite of Goldilocks, its both too hot (inflation) and too cold (growth). Call it stagflation if you wish, but that would imply wage growth and there's none of that going on. So lets go with the ZH meme of biflation (and if any of the pedants on this site who insist on saying stagflation want to complain, you can shove it. You know who you are).

A conservative government is presiding over a severe recession once again. I would suggest what they might do differently this time is open up coal mines, rather than shutting them down, given the price of the commodity.

EscapeKey's picture

The thing with regards to biflation, however, is that during all periods of inflation, some things rise in price, some fall, with a typical emphasis on necessities and luxuries. During hyperinflation, I would expect Porsche 911's to be relatively cheap compared to now, but heaven forbid I would want meat for lunch.

Dismal Scientist's picture

For me, there's no chance of hyperinflation unless wages tag along in the general upward surge. I just can't see it happening even at the level to help people keep up with headline inflation running under 5% per annum, let alone the true level which must not be named...

EscapeKey's picture

Hyperinflation = political event. Such as sudden lack of faith in currency, like the realization that the US is monetizing about 100% of the deficit, and will never, EVER, pay back their debt in an honest fashion.

Besides, I've heard deflationistas word the same argument why we'd never see inflation given the current scenario.

Beam Me Up Scotty's picture

Exactly.  Hyperinflation isn't really "bad" inflation.  They are 2 different animals.  Hyperinflation is loss of faith in a currency.  Thats already here to some extent---people buy gold and silver because they don't have faith in the US$.

MachoMan's picture

It isn't just PMs, it's firearms (durable), farmland, hand tools, you name it.  People are already actively converting their wealth from the ether into something tangible, something real and, I think to a large extent, care not about any paper losses in the transition.  They just want to be left with something, anything post collapse.

Like other aspects of the market, the "market" has already collapsed...  perceptions changed...  paradigms shifted...  it's just that other actors with more control have desired for collapse to occur at a later date, regardless of the ultimate cost.

Dismal Scientist's picture

I am well aware what hyperinflation is. For some reason you mentioned it in the context of 911's. My original comment was that we have biflation, not stagflation, since wages are not going up. Whats your point ?

EscapeKey's picture

That the term "biflation" is a red herring. That "Biflation" wouldn't be observable during periods of severe inflation is highly unlikely.

MachoMan's picture

Oh, I thought you were gonna say because biflation is impossible given the aggregate money supply cannot expand and contract at the same exact point in time.

EscapeKey's picture

Valid point, but I wasn't really thinking in terms of the austrian definition of inflation...

TumblingDice's picture

Time to work in forecasts into those algos boys.

Now, I'm no expert on the weather, but it seems like a pretty clear h&s on the gbpusd developing.

gookempucky's picture

Global REAL GDP needs construction period. The worlds construction industry is one of the biggest industries in the whole world. The contribution of this industry towards the global GDP revolves around one-quarter of the total amount. The world construction industry is also a value production generator and provides work to almost 15-20 percent of the total employed person in the whole world. The extent of this industry has become so vast that the energy, in the form of electricity or fuel, consumed by it hovers around two-fifth of the total energy consumed all over the globe. The resources that are utilized in the world's construction industry is also staggeringly high and itself consumes fifty percent of the total world resources. I include world construction to include Commercial/residential/rebuilds/bridges/hiways/ship building/ironworks/UG infrastructure/water facilities/railways and energy use facilities. My view is that 50% of all GDP numbers are just illusionary scrip and add's no value production, without value production there is no recovery anywhere.

BigJim's picture

I agree. GDP is a misleading indicator of wealth creation.

Let's say a city gets wiped out by an earthquake. The following construction boom will result in high GDP figures, but everyone (jn aggregate) will be a lot poorer because all that activity went into replacing stuff that had already existed.

Throw in all the jiggery pokery that government statistics bureaus indulge in, and laughable inflation calculations, and GDP figures are dubious measures of how a country is faring.

Quintus's picture

Here's another piece of good news!

The UK National Statistics Office has now started including the debt taken on by the State as part of the Bank bailouts in the overall National Debt calculations.

Here's the fun bit:

"The unadjusted measure of public sector net debt expressed as a percentage of gross domestic product (GDP), was 154.9 per cent at the end of December 2010 compared with 157.9 per cent at end of December 2009. Net debt was £2322.7 billion at the end of December compared with £2248.4 billion a year earlier."

Get that?  If you count ALL of the debt, and not just the bits you like, debt to GDP has nearly tripled to 154.9% and the Debt itself has jumped from £889 Billion to £2,322.7 Billion.  No problem there at all.  Everything's just fine.

Now, in the interests of fairness and consistency, can we have the Fannie and Freddie debt included in the US national debt calculations?  Yeah right.  

doggings's picture

this is pretty stunning that they have chosen to fess up and do this.

maybe theyre actually realising just how fucked they are and decided it might be better if the people actually understood.

&lol@ the idea of the US govt ever telling the whole truth.


EscapeKey's picture

I'm sure it was just a coincidense this was released on the same day as the GDP miss.

I wonder what other peals they will bury today.

Matto's picture

When money is debt and debt is money the expansion of credit is the only growth factor you need. Forget productive allocation of capital, that stuff is pre-digital.

EscapeKey's picture

Holy beeping shit. Thanks for your post.

Oh regional Indian's picture

Now if they had payed attention to Piers Corbyn instead of the MET office, they could actually have planned for it.

Now here is some planning news for the US.

Crazy storms in the North-East/East coming up the rest of this week. Think biblical.

Prepare accordingly?

hey're calling them Thundersnows!


Id fight Gandhi's picture

Amazing they shrug off the data and most of Europe is up.

Gold, pound and oil tanking. Meh. Another up US day?

doggings's picture

gold is creeping up valued in GBP

spanish inquisition's picture

A really big opportunity missed to blame global warming here. Because hot air floats up, it has displaced all of the arctic air at the pole. Pushing it south over England and the US. So the more global warming there is the colder it will get as all the arctic air moves south.

Edit: Have not seen a sunspot report from Art in a while.

Jason T's picture

I have a client in Britain.. I asked her back in the fall how economy was doing there ..her reply: it's rubbish.