The Office for National Statistics (ONS) reports of a 1% rise in UK GDP for the third quarter suggest that UK GDP seems stronger than expected by the financial markets. (The median market forecast was for a rise of 0.6%.) The new GDP growth figure, together with downwards revisions to previous ONS estimates of public borrowing, will help to ease the political pressures on the Chancellor, especially Labour’s demand to implement a Plan B.
However, the Chancellor – and the country – should read the figures with caution.
The fairest assessment is that HM Jubilee and, to a lesser extent, the Olympics and Paralympics shunted activity from the second quarter into the third. An average of the GDP growth rates in the second (Q2) and third (Q3) quarters comes out at 0.3% or an annualised equivalent rate of 1.2%. This figure of 1.2% is probably as good an estimate as can be made of the current underlying growth rate. At the same time, the headline GDP figures have been distorted by the rundown in output of North Sea oil and gas without which real GDP would have risen by 0.2% in the year to the third quarter rather than showing the zero growth actually recorded. Taking the first three quarters of 2012 together, headline GDP was 0.2% down on the year while non-oil GDP was up by 0.1%.
The wider picture from the new data for the third quarter suggests some decline in specific industries, and at the same time a growth in government.
Construction output was weakest, with a year-on-year drop of 10.8%. Large falls were also recorded in ‘mining and quarrying’ (down 6.6%). Agriculture was down, by 5.1%. By contrast, the strongest annual growth was recorded in ‘government and other services’ (up 2.5%), begging the question ‘cuts, what cuts?’, a question arising also from second quarter 2012 (Q2) expenditure measure of GDP.
But the good news comes from Britain’s financial heart. The strongest predominantly private sector increase was the 1% rise in ‘business services and finance’ contrasting with the 0.8% drop in manufacturing output over the same period. There are lessons here for the Coalition, including Business Secretary, Dr Cable and other advocates of a return to a manufacturing based economy.
*David B Smith is Visiting Professor in Business and Economic Forecasting, Derby Business School & Chairman IEA Shadow Monetary Policy Committee. He is author of the Politeia pamphlet Crisis Management: How British banks should face the future.