UK Economy Double Dips For First Time Since 1970s

Tyler Durden's picture

For anyone who may have been concerned that the BOE was serious in its recent "admission" that it just may not ease further, or engage in more QE for that matter, we have good news: the UK economy just double dipped for only the first time since the 1970s, following a stunning Q1 GDP release which came in far weaker than expected at -0.2% while the consensus was looking for a 0.1% rise. In other words, the UK has just followed such other pristine example of economic success as Spain and Greece into double dipping. Bloomberg economist Niraj Shah brings even more bad, pardon good, news: 2Q GDP may also contract as a result of additional bank holiday in June. Construction output knocked 0.2 ppt off of quarterly GDP growth. Per Shah, the BOE may point to drop in construction as a possible aberration in data, concerns will remain over the strength of the service sector as output there rose only 0.1% Q/Q. The U.K. has contracted 9 quarters since first falling into recession in 2Q 2008. All in all this is great news for those desperate for bad news and explains why futures, and the EURUSD are spiking.

Goldman's take, which naturally tries to put the data in a favorable light:

BOTTOM LINE: The ONS’s Preliminary Estimate indicates a 0.2%qoq decline in Q1 GDP, implying that the UK has returned to recession. The data is difficult to reconcile with other indicators of activity – our UK Current Activity Indicator, for instance, is consistent with +0.3%qoq (+1.2%qoq annl.) growth in Q1 – and the MPC has suggested that the recent weakness of official data is “perplexing”. In time, we expect the data to be revised significantly higher.

1. GDP was dragged down by a 3.0%qoq (12.6%qoq annl.) contraction in construction and, excluding this sector, output would have been broadly flat (Table 1). However, reflecting the weakness of the ONS’s monthly data for this sector, that decline had been widely anticipated. The main surprise in today’s release is that the weakness in construction was not offset by a gain in services output: the ONS’s monthly data for services – which had been available only until January – suggested that services output would register a substantial gain. However, according to the ONS’s first full-quarter estimate, output in this sector rose by only +0.1%qoq in Q1.

2. The data is difficult to reconcile with other indicators of activity: our UK CAI is consistent with +0.3%qoq (+1.2%qoq annl.) activity growth across Q1 as a whole, and reached a level consistent with +1.6%qoq annl. growth in March. The PMIs, meanwhile, are consistent with GDP growth of +2.0-2.5%qoq annualised.

3. Some readers may recall that there was a similar discrepancy between official data and survey data in the second half of 2009. The ONS’s Preliminary GDP Estimate for 2009Q3 implied that output had fallen by 0.4%qoq, a release that we described at that time as “unbelievable”. Following a series of significant upward revisions, the GDP data for 2009Q3 now indicates that output rose by +0.2%qoq. More generally, where there is a discrepancy between business surveys and the ONS’s early GDP estimates, we find that business surveys typically provide a more accurate guide to 'post-revision' GDP data. Faced with a similar discrepancy between surveys and the ONS’s Preliminary Estimate, we view today’s data as similarly unbelievable.

4. Ahead of the Q1 release, the Bank of England’s MPC has also been largely dismissive of the weakness of official data, describing the sharp fall registered by the latest official construction data as “perplexing”. The committee places significantly more faith in the improvement registered in Q1 by business surveys (and in their own Bank of England Agents’ Reports). In their view, “underlying aggregate activity growth was likely...to have picked up since the second half of 2011”, despite the possibility that the ONS could “report further falls in GDP in both the first and second quarters”.

5. Nevertheless, today’s data has significance in shaping financial market perceptions (note that the big revisions to GDP data typically take place 2-3 years after the initial release, by which stage the market’s focus has long since moved on). As the MPC also noted in the April Minutes, it is possible that the weakness of official GDP data “might further damage household and business confidence, even if the underlying pace of economic expansion were stronger.”