Bump In The Road

27/01/2012 at 1:31 pm

This week saw the publication of “advance estimate” (first stab) UK GDP data for the final quarter of last year. As expected it showed a setback, with output down 0.2%.

This was inevitably reported to be a disaster. Her Majesty’s loyal opposition blamed the government’s not-terribly-drastic austerity programme; the Chancellor blamed goings on in the eurozone.

The real culprits are more likely to have included a stronger pound, with trade weighted sterling over 4% stronger over the second half of 2011, and the continued squeeze on real incomes arising from Britain’s unusually high rate of inflation. (The latter effect in particular goes a long way to explaining why the recovery in our GDP since the bottom of the recession in 2009 has not only lagged that of the US but also that of Japan and the eurozone.)

Be that as it may: if the eurozone is not yet finished, neither are we. Last year began in similar circumstances with a -0.5% fall in GDP reported for Q4 2010. It proved to be transitory. And other data released over the last few days also suggest an economy which is experiencing a bump in the road to recovery rather than a fall over the cliff into serious recession: retail sales growth of 2.6% in the year to December was stronger than expected, BBA data on mortgage lending continued to post a modest improvement and industrial orders data for January saw a welcome bounce.

Most importantly, data on government borrowing – specifically the figure for public sector net borrowing excluding financial interventions, “PSNB ex” – was stronger than expected despite the weak outturn for GDP. According to the Office for Budget Responsibility, the UK may now even be on track to outperform its debt target for the current fiscal year.

None of this is to suggest that a contraction in GDP, however slight, is good news. Apart from anything else the data could well trigger another cavalier display of pointlessness from the Bank of England in the form of more “quantitative easing“. Nor does it alter the fact that the UK’s debt burden is an ugly one and that we have been lucky so far in that bond markets have given us the benefit of the doubt. But there is a world of difference – here and elsewhere – between standstill and collapse. Markets are beginning to bet more on the first than the second of those alternatives. This week’s data from the UK suggests that they might be right.

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