UK GDP is provisionally estimated to have risen by 0.2% last quarter and by only 0.7% over the last year. These figures understate the economy’s underlying progress because of a big fall in North Sea production and special factors that depressed the second-quarter outturn – the royal wedding bank holiday, disruption due to the Japanese earthquake / tsunami and Olympic ticket sales that will not be recorded in the national accounts until the third quarter of 2012. Without these effects, GDP would have risen by 0.8% last quarter and by 1.6% over the last year. (These numbers are derived by summing the increase in GDP excluding oil and gas production – 0.3% on the quarter and 1.1% on the year – and the official estimate that special events subtracted a net 0.5% from the level of output in the second quarter.)
1.6% annual growth is disappointing but may be in line with the expansion of productive potential, with the trend rate of increase of productivity depressed by an overinflated public sector and resource misallocation due to the credit bubble. This interpretation is consistent with the solid 1.1% rise in employment over the last year and business survey evidence indicating a rise in capacity utilisation.
Policy-makers should aim for faster growth than potential to absorb remaining economic slack, although the negative “output gap” is probably much smaller than widely assumed. Rather than a less contractionary fiscal Plan B, however, the economy needs a Plan A to cut inflation, which has been a much bigger drag on growth via its depressing impact on real money and income expansion. More QE would work in the opposite direction by tanking sterling and causing another surge in import prices.
The chart compares the recent path of GDP excluding oil and gas production with previous recessions / recoveries, with the peak quarter of output rebased to 100 in each case. The current cycle continues to resemble the late 1970s / early 1980s – the peak to trough fall in non-oil GDP was 6.3% in 1979-81 versus 6.2% in 2008-09, while the level of output in the second quarter of 2011 was slightly higher than at the comparable point of the early 1980s recovery (even before adjusting for distortions). Unemployment of 7.7% now compares with nearly 11% then. Economic conditions remain difficult but gloom about recent performance and prospects is overdone.
