GDP and services output data released today confirm that the economy has bounced back strongly from winter weakness while the current inflation overshoot reflects domestic income pressure as well as VAT and external factors – contrary to the MPC's assertions.
GDP growth of 0.5% in the first quarter conceals an estimated rise of 2.2% between January and March as bad weather effects unwound. March output was 1.2% above the first-quarter average and "only" 2.9% below the peak quarterly level of GDP in the first quarter of 2008 – see first chart. (The monthly GDP estimate is calculated from ONS data on industry and services and a Eurostat series for construction output.)
The March GDP reading was boosted by a surge in construction output that is unlikely to be sustained. The additional bank holiday in April, meanwhile, will depress GDP in that month and for the second quarter, with an unwind in the third quarter. Even so, the MPC's apparent assumption of GDP growth of only 0.3% in the second quarter seems low in light of the March estimate.
The expenditure breakdown of GDP – unreliable at this stage of the estimation process – implies that net exports accounted for all of the growth in the first quarter and most over the last year. Household consumption fell by 0.6% last quarter but this reflected an inflation squeeze rather than a reluctance to open wallets – the nominal value of spending surged by 2.1%, to stand 5.2% higher than a year before.
The domestic contribution to inflation is measured by the "implied deflator for gross value added at basic prices" – this excludes indirect taxes and import prices and is essentially the sum of wages, profits and rents per unit of output. The GVA deflator rose by 2.4% in the year to the first quarter – at odds with the MPC's claim that the inflation overshoot reflects "exogenous" factors. Slow growth in pay costs has been offset by a surge in non-wage income – second chart.
While CPI inflation of 4.5% in April remains below the peak of 5.2% reached in September 2008, the national accounts measure of consumer inflation is well above its equivalent high. The consumer spending deflator rose by 5.6% in the year to the first quarter, the largest annual increase since 1992 – third chart.
