Yesterday's GDP figures, showing a 0.2% decline in the third quarter, disappointed economists expecting a more substantial upward revision to the previously-estimated 0.3% fall. The report's details, however, support recovery hopes and were reinforced by today's October services output number.
- A monthly GDP estimate derived from data on services and industrial output indicates that the third-quarter decline was due to a blip lower in August – see first chart. GDP is on course to post a solid gain in the fourth quarter, with the October estimate 0.3% above the third-quarter level.
- Last quarter's contraction was mainly due to lower North Sea output – GDP excluding oil and gas extraction fell by just 0.04%. This measure has declined by less than during the 1979-81 recession – 5.6% since the first quarter of 2008 versus 6.4% between the second quarter of 1979 and first quarter of 1981.
- An expenditure-based measure of GDP is more upbeat than the "official" series, which relies heavily on gloomy output data. Excluding statistical adjustments, expenditure GDP rose by 0.5% in the third quarter – second chart. This measure also suggests a later start-date to the recession, peaking in the second rather than first quarter of 2008.
- Destocking was again heavy in the third quarter, implying a substantial GDP boost as it subsides. Meanwhile, household finances have improved more rapidly than expected: the saving ratio is at an 11-year high while the debt to income ratio has fallen by 18 percentage points from its peak – third chart.
- As in the US, non-financial companies continue to run a large financial surplus (i.e. retained earnings are far ahead of capital spending) – typically a precursor of more expansionary behaviour. Excluding reinvested foreign earnings, the surplus amounted to 2.4% of GDP last quarter versus 1.3% in the US. Excess free cash flow, rather than credit supply constraints, is the main driver of the ongoing repayment of bank borrowing by companies.
