The claim by the Office for National Statistics that GDP fell by 0.2% in the first quarter following a 0.3% fourth-quarter decline deepens the “productivity puzzle” – the apparent contradiction between output and labour market data.
A previous post warned that construction would act as a significant drag on first-quarter GDP but the surprise in today’s release was the weakness of the rest of the economy – GDP ex. construction was flat.
Total hours worked in the economy, however, rose by 1.4% in the three months to February from the prior three months. Official statistics, in other words, are inconsistent, suggesting that output has fallen despite a rise in labour input.
On a year-over-year basis, GDP was unchanged in the first quarter while hours worked fell by 0.1% in the three months to February. Productivity, seemingly, rose by only 0.1%. In its last Economic and fiscal outlook, the Office for Budget Responsibility forecast that “potential” productivity would increase by 0.6% in 2012. Growth was projected to pick up to 2.2% by 2015 – in line with the pre-crisis trend.
The “puzzle” may be lessened by future upward revisions to GDP but these are unlikely to be large enough to reverse the conclusion of dismal supply-side performance, carrying negative implications for inflation and fiscal prospects.
The GDP decline will dominate the headlines but the April quarterly CBI industrial trends survey also released today is arguably more significant, suggesting an improved economic outlook – seasonally-adjusted business optimism rose to its highest level for two years. Employment expectations were particularly strong but skill shortages jumped – further evidence of supply-side weakness.