GDP was an estimated 0.5% below its third-quarter level in October, based on today’s news that services output fell by 0.7% between September and October together with earlier reports of changes of -0.7% and +0.6% in industrial production and construction output respectively. A quarterly fall in GDP, nevertheless, is not a done deal since monthly statistics are volatile and often revised heavily. The services PMI business activity index rose from 51.3 in October to 52.1 in November, suggesting a rebound in output.
Taking a step back, a 0.25% decline in GDP in the fourth quarter would imply full-year growth of 0.9% in 2011 – very disappointing relative to a consensus expectation of 2.1% at the start of the year. There are, however, two important qualifications.
First, part of the shortfall reflects a decline in North Sea production that should arguably be stripped out in assessing underlying economic performance. Gross value added excluding oil and gas is on course to rise by 1.3% in 2011 assuming a 0.25% fourth-quarter decline.
Secondly, there were two fewer working days in 2011 than 2010 – 251 versus 253, with one of the lost days due to the additional Royal Wedding bank holiday*. GDP statistics do not adjust for working days, implicitly assuming that lost output is recouped within the quarter or year. On an alternative assumption – admittedly equally arbitrary – that each lost working day leads to a permanent half-day loss of output, GDP growth in 2011 was depressed by about 0.4 percentage points (i.e. one day as a percentage of 253), implying a “true” rate of expansion of about 1.3%, or 1.7% excluding oil and gas. (The effect turns positive in 2012, when there are 252 working days despite an additional bank holiday to celebrate the Queen’s Diamond Jubilee.)
*The number of working days in 2011 was the lowest since at least 1967, according to the website www.work-day.co.uk. There have been two previous years since 1967 when the number of working days fell by two – 1977 and 2005. In both cases, GDP growth was lower than in the prior and following years.
