Available evidence suggests that the preliminary estimate of third-quarter GDP to be released on 27 October will show quarterly growth of 0.4-0.5%, following a 0.7% second-quarter gain. This compares with the Treasury’s pre-EU referendum projection of a 0.1% GDP fall in the third quarter in the event of a Brexit vote in its milder “shock” scenario, and a 1.0% decline in its alternative “severe shock” scenario.
The 0.4-0.5% prediction reflects the following considerations:
GDP in July is estimated to have been 0.4% above the second quarter level, based on monthly output data for services, industry and construction.
The services turnover report for August released yesterday suggests that output in the sector rose slightly further (or July’s increase was slightly larger than currently estimated)*. The projected gain offsets the impact of already-reported August falls in industrial and construction output.
The GDP number will incorporate Office for National Statistics estimates of sectoral output in September. These estimates will be based partly on statistical models that are likely to extrapolate recent growth.
Solid third-quarter growth – if confirmed – does not, of course, imply that the Brexit vote has had no negative impact, nor that forecasts of economic weakness will not prove correct over a longer time horizon. The view here will continue to be guided by monetary trends, which suggest that growth will remain respectable through spring 2017, at least – see previous post.
The Treasury’s inaccurate projection reflects two mistakes: like most other forecasters, it significantly underestimated the economy’s momentum at the time of the vote; and its assessment of the impact of a Brexit outcome was based on implausibly negative assumptions about uncertainty effects and financial conditions. The forecast of a recession, indeed, appeared to have been reverse engineered – see previous post.
*The relationship between the turnover and output data was discussed in a previous post.