Money Moves Markets

While the fall in GDP in the fourth quarter has been revised from 1.5% to 1.6%, the expenditure breakdown is less negative than last month. On the new figures, the stocks cycle accounts for the entire decline in GDP last quarter. GDP excluding stocks actually rose by 0.1%, with falls in consumer spending and investment offset by higher government consumption and stronger net exports.

The big drag from stocks suggests the decline in GDP peaked last quarter. Destocking amounted to 1.3% of constant-price GDP – the largest since the fourth quarter of 1990. This was two quarters into the last recession, when GDP was 70% through its peak-to-trough decline. GDP weakness over coming quarters will be driven by investment and consumer spending.

Other notable features of the data released today include:

GDP fell by 2.0% in the year to the fourth quarter but gross national income (GNI), which includes net income from abroad, plunged by an estimated 4.0% – the biggest annual fall since 1980. (Constant-price GNI is calculated by deflating current-price GNI using the GDP deflator.)

The household saving ratio surged to 4.8% in the fourth quarter, the highest since the first quarter of 2006 and up from a low of -1.2% in the first quarter of last year. The ratio is likely to rise further – it has averaged 6.8% since 1985 – but the significant adjustment to date reduces downside risks to consumer spending.

The figures do not support deflation claims. The price deflator for gross value added – which excludes the impact of the VAT cut – rose by 1.2% from the third quarter to stand 3.3% higher than a year before.

Private financial corporations’ operating surplus surged 36%, or £5.1 billion, last quarter, apparently reflecting a rise in banks’ net interest receipts. As explained in a previous post, the operating profits – not reported earnings – of the Lloyds Banking Group and the Royal Bank of Scotland will be counted as public sector income from October last year, reducing public net borrowing. (The reclassification has yet to be reflected in public finances data.)

The current account deficit was just 1.7% of GDP in 2008 – inconsistent with claims that sterling was “grossly overvalued” before its recent plunge.