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Solid UK Q3 GDP questions MPC easing

Posted on Thursday, October 27, 2016 at 11:58AM by Registered CommenterSimon Ward | CommentsPost a Comment

The preliminary estimate of a 0.5% rise in GDP in the third quarter raises further doubts about the MPC’s pre- and post-Brexit vote economic analysis and should extinguish any remaining expectations of an additional cut in Bank rate. There is, indeed, a case for suspending the current QE programme to reflect the much stronger economic environment than the MPC expected.

The 0.5% increase compares with a 0.4-0.5% projection here and a consensus estimate of 0.3%. Strong services growth of 0.8% over the quarter offset falls of 0.4% and 1.4% in industrial and construction output. Within services, output of “transport, storage and communications” rose by 2.2%, boosted by strength in creative activities (film, video and TV programme production, sound recording and music publishing). “Business services and finance” and “distribution, hotels and restaurants” also made significant growth contributions.

The preliminary estimate is based on only about 44% of the information that will be incorporated in the final output-based GDP measure. Historically, however, an upward growth revision has been slightly more likely than a downgrade.

Monthly output data underlying the 0.5% growth estimate imply that GDP rose steadily over the three months, with September’s level 0.1% above the quarterly average – see first chart.

GDP rose by 1.2% (2.4% annualised) in the second and third quarters combined, the fastest two-quarter growth since the fourth quarter of 2014. A pick-up in momentum had been suggested by monetary trends: six-month growth rates of real narrow and broad money (as measured by non-financial M1 and M4 deflated by consumer prices) increased in late 2015 / early 2016 – second chart.

The MPC ignored monetary trends and has misread the economy. At its July meeting, the Committee judged that the Brexit vote “was likely to depress economic activity in the near term”. It was more explicit in August, expecting “little growth in GDP during the second half”, with the Bank’s staff forecasting that the preliminary third-quarter estimate would show no change from the second quarter. Better data forced an upgrade in September but the MPC still anticipated “a material slowing of UK GDP growth”, with the staff estimating a preliminary third-quarter rise of only 0.2%.

The MPC can, at least, pass the dunce’s cap to the Treasury, which predicted that GDP would fall by between 0.1% and 1.0% in the third quarter in the event of a Brexit vote.

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