25 May 2011

How the UK economy contracted over the past six months. Slightly.

Aides to the Chancellor are understandably much more enthused by the jibs numbers rather than GDP at the moment. They point to the 118,000 jobs created in Q1, which is higher than the US and Germany.

So buried in table A2 of the second reading Q1 GDP figure is an interesting fact, aside from the confirmation of 0.5 per cent growth. (Remember all the pundits assuring us that this very soft figure would be revised up? Well it didn’t happen).

British economy officially shrank in the six months between Q3 2010 and Q1 2011. £330,656m in Q3 to £330,645m in Q1.

A whole £11m smaller.

Gross domestic product and gross value added


A fraction of a per cent, but down nonetheless. This does not count as a recession, but using George Osborne’s own description of +0.1 per cent enjoyed by Darling “as weak growth as you can get”, then the six month trend is bad.

The economy is undoubtedly and demonstrably flat as a pancake, and if you’re really pedantic, it has contracted very slightly over six months. This consists of a snow-caused slump, and its subsequent unwind (0.5 per cent Q1 “growth”). But net we are down, slightly.

The sectoral patterns are interesting. The consumer IS in recession, having endured two quarters of contraction. Business investment is a key worry, reflecting the Bank of England’s concern that export companies aren’t borrowing to invest to take advantage of the weak pound.

That said, trade did boost the economy, without it we’d have double-dipped. Perhaps surprisingly, government spending continues to add to growth at the moment.

But you hear a lot less about the snow these days. The green line on this Bank of England graph shows why.

As I argued last month, strip out the impact of the snow on both of the last quarters, and the depressing reality of UK GDP is that it would have been zero and zero in both of the last two quarters. We are still awaiting the private sector recovery.

 And the cuts are about to arrive in earnest.