Duncan’s Economic Blog

GDP – what would be a good number?

Posted in Uncategorized by duncanseconomicblog on April 26, 2011

Tomorrow at 9.30 am the first estimate of GDP growth for the first quarter of 2011 will be released. Given that this will doubtless be accompanied by a blizzard of claims and counter-claims (not least from myself!), it makes sense to start thinking about this number now and considering what would be a good result and what would be a cause for concern.

First things first though – this is a first estimate based on incomplete data and will be subject to later revision. In any case – it almost never makes sense to get too caught up in any individual data point when analysing an economy.

What’s more this number is very hard to forecast, back in January we learned that the economy had shrunk by 0.5% in the last quarter of 2010, at that time most economists were expecting growth of around 0.5%.

The other important thing to remember is that this number will only tell us how the economy performed in January, February and March, i.e. after the VAT rise but before the impact of most of the cuts, which began in April. Whilst a bad number is obviously a reason to worry, a ‘good’ number doesn’t mean we are out of the woods yet. Severe cuts could easily crimp growth going forwards.

Important caveats aside what would be a good number?

The FT has a good summary on this very question today. They say –

–         Given that snow subtracted 0.5% from growth in Q4, we should expect this to ‘bounce back’ in Q1.

–         In addition, some services and purchases (according to the ONS) were postponed in Q4 and should now fall into Q1. So the real minimum we are looking for is about 0.7%.

–         If 0.7% would represent no real growth over two quarters, then 1.2% would show the expected bounce back from Q4 plus the economy growing at ‘an average pace’ in Q1.

–         ‘Arguably’ (says the FT) it should be even higher, around 1.7% if we account for some of the underlying stagnation in Q4 being reversed.

In terms of what observers expect,  the OBR and the Bank of England have both pencilled in 0.8%.  City analysts are more pessimistic with JP Morgan going for a very weak 0.2%, Citi saying 0.5% and Goldman at 0.6%.

So, I think it’s fair to say, that any number below 0.5% would be terrible, 0.6% to 1.2% would be merely bad, 1.3% to 1.7% would be reasonable (i.e. what we should expect but nothing to get excited about) and over 1.7% would be good.

What this really brings home is how important it is to consider the severe disruption the quarter before when looking at tomorrow’s figure.

For example if growth comes out at 1.2%, it will in reality mean that the economy has managed an average pace of growth over the past six months (ahead of the cuts). But that would also be the strongest quarter on quarter growth since 1999 and well ahead of the OBR forecast, something I’m sure certain observers would be very quick to point out.

We’ll know more tomorrow.


The Spectator Coffee House says that:

A positive number, and we shall be recovering again. A negative number, and we shall have experienced two consecutive quarters of shrinkage — which is to say, the country will be back in recession. Happily for George Osborne, then, but less so for Ed Balls, most signs are pointing towards the former. The consensus among forecasters such as the NIESR and the CBI is for growth of around 0.5 percent; far from overwhelming, but growth nevertheless. And the Chancellor himself is said to have told Cabinet today that the economy is “on the right track. (My emphasis)

Talk about setting the bar low! Any growth at all would be a ‘happy’ result for Osborne and 0.5% growth (i.e. no growth in past six months) would be a decent one? Wow, I hadn’t realised we were aiming for stagnation.

Compare and contrast to the FT article linked to above:

Add in one quarter of the growth expected in 2011 – about another 0.5 per cent – and the figure necessary to show the economy growing at an average pace in the first quarter is at least 1.2 per cent.

8 Responses

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  1. Left Outside said, on April 26, 2011 at 10:42 am

    The cuts will reduce the Government bit of GDP, but shouldn’t the wider macroeconomic effects of fiscal contraction be priced in to a lot of private investment and consumption decisions already (a la Friedman’s permanent income hypothesis)? I think you may be somewhat over estimating how big a “kink” in economic performance we’ll see when the cuts really bite.

    Otherwise, good post, nice to know where the yard sticks are.

    • duncanseconomicblog said, on April 26, 2011 at 11:04 am

      Yes – certainly the impact of the policies on investment and consumption (as measured by confidence) is already visible.

      As for the cuts themselves, it’ll depend on how ‘lumpy’ they are.

  2. Mike said, on April 27, 2011 at 7:46 am

    About 10 years ago, I seem to remember the media defined recession as two consecutive quarters of below trend growth, never mind contraction. This has been forgotten of late.

  3. WORLDLINES - June 28, 2009 said, on April 27, 2011 at 9:28 am

    […] would be a “good number”, then? Duncan Weldon, the economist and blogger, has written a good post looking at this question. Here’s his conclusion: I think it’s fair to say, that any […]

  4. Fresh Purple said, on April 27, 2011 at 10:24 am

    How does this tie in with the current inflation figures? With that running somewhere between 3-5% would that mean that actual output has fallen after adjusting for inflation?

    • duncanseconomicblog said, on April 27, 2011 at 1:29 pm

      The figure is adjusted for inflation bu the GDP deflator. 0.5% is real growth. Or, since Q3, there has been zero real growth.

  5. […] of today’s results, Duncan Weldon set out some standards for judging these figures any number below 0.5% would be terrible, 0.6% to […]

  6. […] of today’s results, Duncan Weldon set out some standards for judging these […]

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