The 0.5% rise in GDP in the first quarter is stronger than it looks because of a large drag from the construction sector that should reverse in the current quarter. Outside construction, the economy has continued to recover over the autumn and winter, consistent with labour market data showing a rise in aggregate hours worked.
Key points:
-
Combined services and industrial output, accounting for 93% of GDP, rose by 0.8% in the first quarter, more than recouping a 0.4% fourth-quarter loss. Monthly estimates, moreover, imply that March output was 0.3% above the first-quarter average, so the second quarter may record a 0.3% gain even if activity is static between March and June – see chart.
-
Construction output fell by 4.7% in the first quarter following a 2.3% fourth-quarter decline, subtracting 0.3 percentage points from GDP growth given its 6% weight (i.e. GDP would have risen by 0.8% if construction activity had remained stable). This reflects carry-over from December's bad weather disruption, with monthly data indicating a strong rebound in February / March. Construction new orders lead output and reached a new recovery high in the fourth quarter, suggesting that output will, at the least, regain its third-quarter level. A return to this level in the current quarter would boost GDP growth by 0.3 percentage points (on top of the 0.3 point base effect from services / industrial output).
-
A reasonable guide to the underlying path of the economy is the 2.0% rise in gross value added excluding North Sea oil and gas production in the year to the first quarter. (The construction distortion is smaller in the year-over-year numbers because activity was similarly depressed by bad weather in early 2010.) This may seem modest but early GDP numbers during recoveries have historically been revised up while trend economic growth may be only about 2% per annum (rather than the 2.35% assumed by the Office for Budget Responsibility).
-
The notion that the economy has been growing at or slightly above trend is consistent with a steady rise in aggregate hours worked and an erosion of spare capacity reported in business surveys, including the Bank of England's agents' survey.
-
Confirmation that the economic recovery remains on track ought to, but may not, prompt the MPC to begin the policy tightening its February Inflation Report implied was necessary to bring inflation back to target over the medium term.
