The better-than-expected third-quarter GDP result is consistent with the forecast here that the economy would regain momentum during the course of 2012 in lagged response to faster real money supply growth since late 2011 – see, for example, a post in May. With monetary trends improving further in recent months, this upswing should be sustained at least through next spring – see chart.
The 1.0% quarterly rise is flattered by an unwind of the Jubilee bank holiday drag in the second quarter and a probable positive net impact from the Olympics / Paralympics. Most of the holiday distortion can be removed by comparing the third-quarter GDP level with the first rather than second quarter. If the third-quarter result is assumed to have been inflated by 0.2% because of the Olympics / Paralympics, “underlying” GDP was 0.4% higher than in the first quarter, following a 0.7% fall over the previous two quarters (i.e. between the third quarter of 2011 and first quarter of 2012).
A 0.2% Olympics / Paralympics boost takes into account the direct impact of ticket sales but assumes that other positive effects displaced activity elsewhere in the economy. This seems consistent with official “nowcasts” of output in the services, industrial and construction sectors in September (i.e. after the Olympics had finished) incorporated in the third-quarter GDP estimate – the implied monthly level of GDP is 0.2% below the quarterly average.
The strong third-quarter GDP rebound confirms that the second-quarter fall was entirely due to the bank holiday distortion. The economy, in reality, contracted in only two quarters – the fourth quarter of 2011 and the first quarter of 2012. GDP fell by 0.4% and 0.3% in the two quarters, or only 0.2% and 0.2% excluding oil and gas production. While satisfying the commonly-used “two-quarter rule”, it is questionable whether this period of weakness really qualifies as a “recession”, in the sense of a “pronounced, pervasive and persistent” decline in economic activity – particularly in view of the resilience of the labour market.
Today’s news supports the forecast here that the MPC will pass on more QE at its 7/8 November meeting, barring external calamities.