GDP grew by 0.3% (0.31% before rounding) between the fourth and first quarters versus an above-consensus estimate here of a 0.2% gain – see Friday’s post. As expected, the rise was driven by solid expansion in the dominant services sector (+0.6%), which offset weakness in construction (-2.5%), with little contribution from industrial production (+0.2%).
The 0.3% GDP increase probably understates economic performance because 1) construction output is likely to have been affected by poor weather and 2) the recent pattern has been for initial estimates of the GDP change to be revised up. GDP would have risen by 0.48% if construction output had been stable last quarter, as suggested by a modest recovery in new orders in late 2012. The quarterly GDP change, meanwhile, has been revised up by 0.15% on average since the start of 2009 (i.e. comparing the initial estimate with the latest data vintage). Taking both considerations into account, “true” growth may have been 0.5% or more.
Today’s news should, thankfully, put to rest silly “triple dip” commentary – silly because the fourth-quarter GDP decline was entirely attributable to a reversal of the Olympics boost in the third quarter so clearly did not signal underlying economic contraction.
The focus now is on how much longer the “double dip” of the fourth quarter of 2011 and first quarter of 2012* survives in the official data. The quarterly GDP changes in the two quarters have so far been revised from an initially-reported -0.3% and -0.2% respectively to -0.1% and -0.1%. As previously explained, the double dip has already disappeared in onshore GDP data (i.e. excluding North Sea oil and gas production).
GDP last quarter was still 2.6% below the peak reached in the first quarter of 2008 but the onshore shortfall is significantly smaller, at 1.7%. The latest onshore GDP index estimate, of 104.5*, is 0.4% below the annual maximum of 104.9 reached in 2007. Moderate further growth in the remaining quarters of 2013, in other words, would result in a new annual high this year.
The sectoral detail in today’s report highlights a continuing depression in the (tiny) agricultural sector – output fell by 3.7% last quarter to stand 14.2% below a peak reached in the second quarter of 2008. Upward pressure on food prices may persist.
*GDP also fell in the second quarter of 2012 but this was attributable to an additional bank holiday.
**Based on 2009 = 100.
Global bank reserves are monitored here as an indicator of central bank policy rather than because they have a significant direct implication for the economy. Reserves can sometimes signal policy shifts that are not associated with a change in official interest rates. This may be useful for anticipating market developments given the importance of policy for investor “risk appetite”.
As previously discussed, aggregate reserves held at the Fed, ECB and Bank of Japan fell to a 12-month low in early March as a repayment of LTRO borrowing by Eurozone banks offset US and Japanese QE. The ECB’s willingness to allow this liquidity drain was a signal of a neutral or even restrictive policy bias and was reflected in a firming of short-term market interest rates (e.g. the three-month EONIA swap). The fall in G3 reserves suggested that the ECB’s “stealth tightening” was more significant than continued US / Japanese easing. The shift away from aggregate accommodation may have contributed to risk assets losing momentum recently.
The G3 total, however, has rebounded strongly over the last month as the Eurozone LTRO repayment has slowed, US QE has continued and Japanese reserves have reconnected with their (now-steeper) expected path – see chart. Aggregate reserves are currently only 4% below the February 2012 high and are certain to move significantly above it over the remainder of the year – the illustrative projection* in the chart shows them climbing 22% by end-2013.
The projection may be conservative if the ECB, as widely expected, responds to recent soft economic news and a fall in inflation by launching further easing. A cut in the headline refinancing rate would not, in itself, expand reserves. The ECB could introduce a new facility allowing banks to borrow at a lower rate (0.25%?) against SME loans, echoing the Bank of England’s funding for lending scheme. Take-up, however, could be modest and drawn-out, judging from UK experience, implying no big impact on reserves.
Global growth may be peaking but significant weakness may be necessary to trigger a bearish market scenario, given ongoing liquidity support. The forecasting indicators monitored here, while moving lower, have yet to signal such weakness.
*The projection assumes that the Fed lowers securities purchases from $85 billion to $40 billion per month during the second half while the BoJ implements its recently-announced QE plan and Eurozone LTRO repayments taper to zero by mid-2013.
UK public sector net borrowing, excluding the temporary impact of financial interventions and the transfers of the Royal Mail pension scheme and the Bank of England’s QE income, was £120.6 billion in 2012-13 – marginally below the Office for Budget Responsibility forecast of £120.9 billion and an outturn of £120.9 billion in 2011-12. The Chancellor, therefore, has avoided the embarrassment of a rise in “underlying” borrowing, although only because of a late-year effort to defer some spending into 2013-14.
Or has he? The above measure, on which media reporting appears to be focusing, still includes a one-off benefit from the transfer of profits of the Bank of England’s Special Liquidity Scheme (SLS) in April 2012. If SLS flows are also excluded, borrowing was £123.0 billion in 2012-13 versus £120.2 billion in the prior financial year.
Does anyone except the Chancellor and Ed Balls care? The “big picture” is that deficit reduction is proving painfully difficult but any feasible alternative strategy – whether involving more or less “austerity” – would probably make only a minor difference to the economic and fiscal outlook.
Since January, the key forecasting indicators followed here have been suggesting a peak in global economic growth in spring 2013. According to some commentators, recent sizeable falls in some commodity prices signal that a big slowdown is already under way. On closer inspection, however, the message from commodity markets is ambiguous.
Precious metals, of course, have fallen hardest but are not a good coincident indicator of the economy. The pessimists place greater weight on recent declines in crude oil and base metals. Yet a broad measure of industrial commodity prices – the Journal of Commerce (JoC) index – has so far displayed limited weakness and remains above its level at end-2012.
The JoC index comprises 18 commodities*, including crude oil and six base metals, with weights designed to reflect importance in economic activity. Index movements correlate reasonably closely with changes in global industrial output – see first chart.
The JoC measure fell sharply in late 2011 following a mid-year industrial slowdown. A smaller decline occurred in mid 2012 despite more pronounced economic weakness. The index, however, rallied in late 2012 / early 2013, confirming a pick-up in global industrial expansion.
At Friday’s close, the JoC index was still 8% higher than six months earlier (i.e. at end-October). Weakness in oil and base metals, in other words, has yet to generalise to other industrial commodities.
This suggests an alternative, positive interpretation of recent developments – a lower oil price represents a favourable supply shock to a global economy that continues to grow respectably, as evidenced by resilience in a broad basket of industrial commodities.
The oil price fall has already contributed to a decline in global inflation – the six-month change in consumer prices, seasonally adjusted, eased to a 30-month low in March. This, in turn, has sustained global real money expansion at a healthy level despite slower nominal monetary trends – second chart.
The recent fall in the US retail gasoline price has yet to feed through fully to the consumer prices index – third chart. The retail price, moreover, should decline further if the wholesale price remains at its current level.
The central scenario here remains for global growth to moderate from the spring but remain respectable – see previous post. Recent commodity price developments, rather than being a reason for increased pessimism, are consistent with this forecast.
*The constituents are cotton, burlap, steel, copper, aluminium, zinc, lead, tin, nickel, hides, rubber, tallow, plywood, red oak, benzene, crude oil, ethylene and natural gas.
Available evidence suggests that the preliminary first-quarter GDP estimate released on 25 April will show a small rise from the fourth quarter, although there is downside risk stemming from March’s unusually cold weather.
The Office for National Statistics (ONS) has released data up to February for industrial and construction output and to January for the dominant services sector. If seasonally-adjusted output in each of the sectors were to remain at its latest-available level, GDP would be unchanged on the quarter, with tiny output rises in services and industry offset by a fall in construction.
There are, however, grounds for believing that services output will build on a 0.4% January gain in February / March. First, average retail sales volume in February / March was 1.7% above the January level. The sales numbers are used to measure retail trade output within the index of services. Retail trade has a weight of 6.9% in the index, implying a 0.12% boost to services output in February / March.
Secondly, turnover figures for February released today suggest a further rise in output of other private services industries. The turnover survey is a key input to the index of services but the published numbers – unhelpfully – are in current prices and unadjusted for seasonal and calendar effects. The chart compares services output with a seasonally-adjusted version of the turnover series – the relationship is imperfect but the monthly change in turnover has directionally matched that of output in nine of the last 10 months, and was positive again in February.
A reasonable assumption, based on the above, is that services output rises by 0.4% in February and is unchanged in March. Absent any revision to earlier data, this would imply a 0.3% quarterly gain, in turn suggesting GDP growth of 0.2% (assuming, as before, that industrial and construction output is unchanged between February and March).
This “forecast” is vulnerable to weakness in services industries not covered by the turnover survey (e.g. government and finance) and could also be upset if the ONS has early evidence of a depressing impact from March’s cold weather, although any such effect will unwind in the second quarter.
GDP growth of 0.2% would be little cause for celebration but the recent pattern of revisions suggests that the preliminary number will be raised over time – quarterly GDP changes since the start of 2009 have increased by an average of 0.15 percentage points (i.e. comparing the latest data vintage with preliminary estimates).