How bad could it get for George Osborne tomorrow?


by Duncan Weldon    
3:28 pm - April 26th 2011

      Share on Tumblr

Tomorrow morning the first estimate of GDP growth for the first quarter of 2011 will be released. Given that this will doubtless be accompanied by a blizzard of claims and counter-claims, it makes sense to start thinking about this number now and considering what would be a good result and what would be a cause for concern.

The important thing to remember is that this number will only tell us how the economy performed in January, February and March, i.e. after the VAT rise but before the impact of most of the cuts, which began in April.

Severe cuts could easily crimp growth going forwards. So whilst a bad number tomorrow is obviously a reason to worry, a ‘good’ number doesn’t mean we are out of the woods yet.

A few things to remember:
1. This is a first estimate based on incomplete data and will be subject to later revision. In any case – it almost never makes sense to get too caught up in any individual data point when analysing an economy.

2. This number is very hard to forecast, back in January we learned that the economy had shrunk by 0.5% in the last quarter of 2010, at that time most economists were expecting growth of around 0.5%.

So what would be a good number?

The FT has a good summary on this very question today. They say:

- Given that snow subtracted 0.5% from growth in Q4, we should expect this to ‘bounce back’ in Q1.
- Some services and purchases (according to the ONS) were postponed in Q4 and should now fall into Q1. So the real minimum we are looking for is about 0.7%.
- 0.7% would represent no real growth over two quarters, then 1.2% would show the expected bounce back from Q4 plus the economy growing at ‘an average pace’ in Q1.
- ‘Arguably’ (says the FT) it should be even higher, around 1.7% if we account for some of the underlying stagnation in Q4 being reversed.

In terms of what observers expect, the OBR and the Bank of England have both pencilled in 0.8%. City analysts are more pessimistic with JP Morgan going for a very weak 0.2%, Citi saying 0.5% and Goldman at 0.6%.

So, I think it’s fair to say, that any number below 0.5% would be terrible, 0.6% to 1.2% would be merely bad, 1.3% to 1.7% would be reasonable (i.e. what we should expect but nothing to get excited about) and over 1.7% would be good.

For example if growth comes out at 1.2%, it will in reality mean that the economy has managed an average pace of growth over the past six months (ahead of the cuts). But that would also be the strongest quarter on quarter growth since 1999 and well ahead of the OBR forecast, something I’m sure certain observers would be very quick to point out.

Update
The Spectator Coffee House says that:

A positive number, and we shall be recovering again. A negative number, and we shall have experienced two consecutive quarters of shrinkage — which is to say, the country will be back in recession. Happily for George Osborne, then, but less so for Ed Balls, most signs are pointing towards the former. The consensus among forecasters such as the NIESR and the CBI is for growth of around 0.5 percent; far from overwhelming, but growth nevertheless. And the Chancellor himself is said to have told Cabinet today that the economy is “on the right track.

Talk about setting the bar low! Any growth at all would be a ’happy’ result for Osborne and 0.5% growth (i.e. no growth in past six months) would be a decent one? Wow, I hadn’t realised we were aiming for stagnation.

Compare and contrast to the FT article linked to above:

Add in one quarter of the growth expected in 2011 – about another 0.5 per cent – and the figure necessary to show the economy growing at an average pace in the first quarter is at least 1.2 per cent.

    Share on Tumblr   submit to reddit  


About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
· Other posts by


Story Filed Under: Blog ,Economy


Sorry, the comment form is closed at this time.


Reader comments


Who cares about short-term numbers? Wonderful kick-about for political obsessives.

Meanwhile, let’s aim to ‘maximise the minimum’ rather than aim for ‘more equality’! ‘More equality’ means levelling down; while ‘maximising the minimum’ means levelling up. Let’s aim to raise living standards overall…in the social democratic tradition…

Meanwhile, let’s aim to ‘maximise the minimum’ rather than aim for ‘more equality’! ‘More equality’ means levelling down; while ‘maximising the minimum’ means levelling up. Let’s aim to raise living standards overall…in the social democratic tradition…

And Ponies! Ponies for all!

Anyway, as I said at your place, the cuts will reduce the Government bit of GDP, but the wider macroeconomic effects of fiscal contraction be priced in to a lot of private investment and consumption decisions already, as we’ve seen in the abysmal confidence of retailers and consumers? I think there’s a danger of over estimating how big a “kink” in economic performance we’ll see when the cuts really bite.

Bad numbers won’t be as bad as good numbers will be good, a bit more doom and gloom won’t dent the coalition too much; “labour’s fault” (I think they’ll find its probably Thatcher’s fault too, but I digress). Good news will “vindicate” x and “condemn” y, and be fully publicised by the coalition who have a great deal of control over the news cycle (as Sunny pointed out over at pickled politics when Cameron’s “I’m a bit weary of migration” speech garnered a lot of coverage).

Basically, “how bad could it be for Osborne?”, probably not that bad but it may be very good indeed.

Ah the sights and sounds of Old London Town; here a jellied eel hawker, there the trooping of the guard and what’s that at the back hunched over a computer? Why if it isn’t a blogger managing expectations over the first estimate of the GDP quarter growth numbers.

Doesn’t it get a bit old?

Ponies? I prefer magic fairies!

“Magic fairies”? Of course! Why didn’t I think of that?! Naturally, the Socialist “magic fairy” will create endless money/resources, so no priorities need to be established! And when she will fails, there will at least be equality of misery!

Try selling that to the electorate – or perhaps you just want to impose it? Either way, Sunny, I’m not sure what you are doing in the Labour Party…

Meanwhile, in other news…Britain’s shortfall in its finances amounted to 10.4pc of GDP in 2010, according to data for each of the EU’s 27 member states from the statistics agency Eurostat. That meant the UK had a bigger deficit than Portugal and Spain. The largest deficit in proportion to the size of the country’s economy was seen in Ireland with a deficit at 32.4pc of GDP.

The first thing to say is that they should stop releasing these early estimates as they are a farce. The revisions that take place up to 24 months after the release of the estimate is an indication how much the GDP guesstimate is a charade for the media. The ONS completely guess the final month of the quarter figures and the MSM will report it as a hard number and never report the more accurate revisions.

I think the consensus figure will broadly be correct. However, GDP growth is a bit abstract for most people. They care about their job if they have one and whether the economy is creating jobs if they do not have a job. As long as employment is rising what is happening with GDP growth is pretty irrelevant to most people. The economy should be performing strongly this year after such a severe slump. The fact that it will only bump along with an anaemic recovery is because the Coalition depressed expectations and confidence indicators through their apocalyptic language. They might reduce growth through cutting back on capital expenditure but whether the local library has two rather than three working in it will make absolutely no difference to GDP growth.

@paul ilc

‘More equality’ means levelling down

Can you substantiate this talking point with evidence as to why you think so?

Richard W

but whether the local library has two rather than three working in it will make absolutely no difference to GDP growth

Yes it would. That redundancy – assuming the individual can’t find other work in an economy boasting 2.5m unemployed – is a drag on GDP growth.

9. inyourhouse

“So, I think it’s fair to say, that any number below 0.5% would be terrible, 0.6% to 1.2% would be merely bad, 1.3% to 1.7% would be reasonable (i.e. what we should expect but nothing to get excited about) and over 1.7% would be good.”

Aren’t the ONS figures for non-annualized growth? So growth of 1.3% to 1.7% (which you consider merely “reasonable”) would be an annualized rate of 5.3% to 6.9% – that’s way above the UK trend, even during the boom years. I think that would have been much more than “reasonable”.

It’s come out as 0.5%, more or less in the middle of the independent predictions, but lower than BoE and OBR predictions. Which means interest rates aren’t going anywhere for a while.

11. AnotherTom

“Aren’t the ONS figures for non-annualized growth? So growth of 1.3% to 1.7% (which you consider merely “reasonable”) would be an annualized rate of 5.3% to 6.9% – that’s way above the UK trend, even during the boom years. I think that would have been much more than “reasonable”.”

Indeed. As ever, I have to question the validity / ideological direction of Duncan’s analysis.

I would have said growth of more than 1% a quarter would be worrying. Annualised growth target is 2.5-3%.

What people aren’t saying is that we didn’t have much of a recession – look at default rates – because of government spending and banks’ support, but the price for there being limited corporate destruction is slow growth. It’s hardly surprising.

12. Flowerpower

The detail is interesting:

Manufacturing – up 1.1%
Services – up 0.9%
Largest sectoral contribution to growth – banks and financial services.

So what are the drags? They appear to be:

Energy utilities
Mining
Construction.

Doesn’t really support the VAT or cuts narratives (except the construction slump – but again, that could be the January weather!)

Doesn’t really support the VAT or cuts narratives (except the construction slump – but again, that could be the January weather!)

That’s certainly what the sector was saying – construction only started picking up at the end of January after a disastrous three months.

The value of U.K. construction work started in the three months to Jan. 31 fell 28 percent from a year earlier as snowy weather hampered building work, according to construction information provider Glenigan.

http://www.bloomberg.com/news/2011-02-14/u-k-construction-work-fell-28-through-january-because-of-snowy-weather.html

10. TimJ

It’s come out as 0.5%, more or less in the middle of the independent predictions, but lower than BoE and OBR predictions. Which means interest rates aren’t going anywhere for a while.

…and more importantly nor is the deficit!

15. Lady Centauria

“Ponies for all” could lead to a large-ish slump in forecourt petrol sales with knock-on effects on the oil industry but hay and stabling costs are pretty high. Current pony purchase prices range from second-hand-old-banger to mid-priced new family car, with a few in the super-car range, so the pony-sales economy would certainly enjoy a temporary stimulus. However, the vast majority of the ponies would have to come from overseas as there are only about 1.75 million horses and ponies in the UK and a large number of those are below working age. There are also costs to muck storage and disposal, ‘though there should be an increase in the availability of manure-based composts and fertilisers.

Mind you, there would be an added stimulus in the cartwright, harness, vetinary and insurance industries. And riding schools, riding- and driving-instructors should see an upturn in business. In the short term, there would be an additional rise in ‘green jobs’ as bridleways and green-lanes are returned to service although introducing ‘pony-lanes’ to the roads might be a slight problem.

All in all, it should be a positive policy for the environment and the economy and I hope that a future Government will have the foresight to introduce this radical platform of measures.

Anyone who wants magic fairies can have them anyway: just close your eyes and say, “I believe in fairies, I believe in fairies,” etc.,

@ 8. BenM

The GDP growth rate that is reported is a measure of increases in production not consumption. As I said what matters is whether the economy is creating net employment. There is no drag on growth through the public sector shedding jobs if the private sector is increasing net employment. That is not an argument to say that this automatically happens when the public sector contracts. However, it is a fact that GDP growth will increase when the private sector expands.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    How bad could it get for George Osborne tomorrow? http://bit.ly/hKbgD6

  2. Youth Fight for Jobs

    RT @libcon: How bad could it get for George Osborne tomorrow? http://bit.ly/hKbgD6

  3. Socialist Students

    RT @libcon: How bad could it get for George Osborne tomorrow? http://bit.ly/hKbgD6

  4. poorbastardmarvin

    RT @libcon: How bad could it get for George Osborne tomorrow? http://bit.ly/hKbgD6 < Not very. End.

  5. Duncan Weldon

    Today's post on tomorrow's GDP figs is up at @libcon http://bit.ly/hKbgD6 What would be a 'good' number?

  6. Scott Macdonald

    RT @gominokouhai Important context for tomorrow's Q1 growth figures: http://bit.ly/g6TmqS Don't let Gideon fool you. >> Read and noted.

  7. sunny hundal

    What would be a 'good' GDP number for Osborne tomorrow? @DuncanWeldon says less than 1% would be bad. Over 1.3% good http://t.co/LdU4bpM

  8. Liberal Conspiracy

    Update: Right-wingers from the Spectator try to dampen expectations for tomorrow's GDP figures too: http://bit.ly/hKbgD6

  9. Brummie Protestor

    RT @libcon: Update: Right-wingers from the Spectator try to dampen expectations for tomorrow's GDP figures too: http://bit.ly/hKbgD6

  10. Pucci Dellanno

    RT @libcon: Update: Right-wingers from the Spectator try to dampen expectations for tomorrow's GDP figures too: http://bit.ly/hKbgD6

  11. matthew choules

    Coalition cuts about to bite? Whilst we wait, up and coming growth figures for the previous quarter.
    http://t.co/8rfp6Tc via @libcon

  12. Politics live blog + PMQs – Wednesday 27 April | moregoodstuff.info

    [...] to go until the growth figures are out, Duncan Weldon at Liberal Conspiracy has a meaty analysis of what would constitute a “good” figure for George Osborne. Here’s an extract. In terms of what observers expect, the OBR and the Bank of England have [...]

  13. Daniel Pitt

    How bad could it get for George Osborne? http://bit.ly/hKbgD6 #ConDemNation





Sorry, the comment form is closed at this time.