Is the UK in a “technical recession”, as claimed by the OECD, which yesterday forecast that GDP would fall by 0.1% in the first quarter following a 0.3% fourth-quarter decline?
The first point is that the fourth-quarter decline could yet be revised away. Neither the widely-watched purchasing managers’ surveys nor labour market data suggested output contraction – aggregate hours worked in the economy rose by 0.4% in the fourth quarter. As an example of the revisability of GDP data, a 0.4% decline originally reported for the third quarter of 2009 has since changed to a 0.2% rise.
The Office for National Statistics releases its initial estimate for the first quarter on 25 April. It has already published January output data for the services and industrial sectors, which account for 92% of GDP. Combined output was 0.4% above the fourth-quarter level. With little reason to expect a relapse in February and March, this has led some commentators to expect a solid quarterly GDP print.
The fly in the ointment, however, is – again – the construction sector. Unadjusted construction output plunged in January to stand 19% below its fourth-quarter average. An attempt to adjust for seasonal weakness implies a still-large 10% decline. Combining this with the 0.4% rise in services / industrial output in January suggests that GDP was 0.4% lower than in the fourth quarter – see first chart. So a rebound is needed in February and March to prevent a quarterly contraction.
Construction output is highly volatile and it is reasonable to expect a big bounce in February and March. This may not, however, arrive early enough to be fully reflected in the initial quarterly GDP estimate. The notion that construction will act as a drag on first-quarter GDP, moreover, is supported by earlier weakness in orders, which usually lead output – second chart.
The view here is that the two-quarter GDP decline definition is misleading and the UK is not in a recession as properly defined as a “pronounced, pervasive and persistent” decline in economic indicators, to use the formulation of the US Economic Cycle Research Institute. The odds are that the first-quarter print will be positive but the ability of official statisticians to wreck the hopes of Chancellors should never be underestimated.