UK Q1 GDP Grows 0.5%, In Line With Expectations

Tyler Durden's picture

Nothing surprising out of the UK, whose economy grew just as predicted, and enough to offset a comparable drop in Q4 of last year. Per Bloomberg: "Gross domestic product rose 0.5 percent from the final quarter of 2010, when it fell by the same amount, the Office for National Statistics said today in London. The result matched the median forecast of 28 economists in a Bloomberg News survey. Services expanded by 0.9 percent, the most since 2006." Now if only inflation could be cut to just double the rate of economic growth... And with the world now looking at the US 1st GDP number due out tomorrow, which will ultimately be revised to sub 2%, we wonder just how a global economy, whose key economies are barely crawling higher, and in the case of Japan, outright collapsing, supposed to lead to a 3.5% global GDP growth in 2011.

Some more on the UK number:

The economy’s production level has returned to where it was before the fourth quarter, when the coldest December in a century disrupted business across the country. Bank of England officials are split on whether growth is strong enough to withstand the biggest fiscal squeeze since World War II, allowing them to remove stimulus to fight inflation.

“The recovery is more muted than we would have liked though the data suggest some underlying strength,” Philip Rush, an economist at Nomura International Plc in London, said in an interview. “The bank will want to see more data showing output is normalizing and may want to wait until their forecast round in August.”

Manufacturing led the rebound.

U.K. manufacturing increased by 1.1 percent in the first quarter, driving a 0.4 percent gain in industrial production. Construction shrank 4.7 percent, the most in two years, the statistics office said.

While the pound’s drop of about 23 percent on a trade- weighted basis since the start of 2007 has boosted manufacturers by making British goods cheaper to buy abroad, they face pressure to raise prices because of higher commodity prices. The Confederation of British Industry said yesterday its measure of expected average selling prices for factories rose to 36 in April from 33 to reach the highest since January 1990.

Visualizing UK inflation and GDP:

And Goldman's take:

Bottom line: GDP rose +0.5%qoq (+2.0%qoq annualised) in Q1, according to the ONS's preliminary estimate, barely reversing the 0.5% decline in Q4. This was in line with consensus but below the Bank of England's February forecast of a +0.8%qoq gain (GS = +0.6-0.7%). While the composition is stronger than the headline number implies (ex-energy GDP rose +0.6%qoq) this is still a weak number.

1. The weakness was centred in construction (-4.7%qoq), utilities (-3.5%qoq) and oil and gas extraction (-0.4%qoq). Manufacturing (+1.1%qoq) and services (+0.9%qoq) were strong and ex-energy GDP rose 0.6%qoq (Table 1).

2. Following the weather-distorted 0.5%qoq decline recorded in Q4, the official GDP estimates suggest that, over the two quarters taken together, growth in the economy was flat.

3. The growth rate implied by business surveys is significantly stronger than this. The Composite PMI, the CBI surveys (both for manufacturing and retail), and the Bank of England's Agents Scores are all some way above their respective historical averages and consistent with above-trend growth. The BCC survey - the weakest of the business surveys - is a little below its historic average, but nevertheless consistent with GDP growth of 2-2.5%qoq annualised. And the latest labour market developments are also difficult to reconcile with the official growth data: in the three months to February, the unemployment rate declined from 8.0% to 7.8%, aggregate employment rose 143k, and average hours worked rose by 0.6%pts, from 31.6 to 31.8. Chart 1 presents a regression-based analysis of what each of these indicators implies for GDP growth.

4. Over time, we expect the ONS's preliminary estimates for growth over Q4 and Q1 as a whole to be revised significantly higher. Early estimates of GDP tend to be biased downwards, on average, in the UK and the upward revisions have typically been especially large during and subsequent to recessions (when economies undergo significant structural changes). The largest revisions to GDP typically occur a number of years after the initial release, when the ONS has access to more comprehensive datasets (such as income tax returns). We won't have truly reliable estimates for Q1 growth until 2013.

5. The MPC also treats the official GDP data with some caution: reflecting the tendency of GDP to be revised into line with survey indicators over time, the MPC estimates its own 'backcast' of GDP data. In the February Inflation Report, the MPC estimated that the level of GDP was likely to be revised 1½-2% higher than reported in the latest vintage of ONS national accounts. Nevertheless, the committee attaches more weight to the official output data than we do and, therefore, the negative surprise in today's data relative to its February forecast is significant. We will update our forecasts for the economy and for policy in the next UK Economics Analyst (published tomorrow).