What is it about GDP in the first quarter these days?

The behaviour of the UK economy so far in 2017 has been something of a hot potato in debate as the numbers swing one way and then the other. Let me give you an example of a ying and yang situation . The downbeat ying was provided last week by the official data on UK retail sales.

The 3 months to March shows a decrease of 1.4%; the third consecutive decrease for the underlying 3 month on 3 month pattern……Looking at the quarterly movement, the 3 months to March 2017 (Quarter 1) is the first quarterly decline since 2013 (Quarter 4).

That was ominous for today’s GDP release as the consumer sector had been part of the growth in the UK economy. Our official statisticians crunched the numbers as to the likely effect.

The 3-month period ending March 2017 coincides with Quarter 1 (Jan to Mar) 2017 of the quarterly gross domestic product (GDP) output estimate. It marks the first negative contribution of retail sales to quarterly GDP growth since Quarter 4 (Oct to Dec) 2013, contributing negative 0.08 percentage points (to 2 decimal places).

However only yesterday there was a yang to the ying from the Confederation of British Industry or CBI.

Retail sales growth accelerated in the year to April, with volumes rising faster than expected, according to the latest monthly CBI Distributive Trades Survey.

Here is some more detail.

59% of retailers said that sales volumes were up in April on a year ago, whilst 21% said they were down, giving a balance of +38%. This outperformed expectations (+16%), and was the highest balance since September 2015 (+49%)…….Sales volumes grew strongly in clothing (+97% – the highest since September 2010), and grocers (+40%). Meanwhile sales volumes decreased in specialist food & drink (-43%) and furniture & carpets (-30%).

If we stay with the specifics of the CBI report its is fascinating to see clothing leading the charge again. Regular readers will recall that this was the state of play last autumn and at that time it was female clothing in particular. So ladies if you have rescued us yet again we owe you another round of thanks. In such a situation you would be the consumer of last resort as well as often the first!

But the issue here is how does this fit with the official data? There is one way it might work and it comes down to the timing of Easter which was later this year than last. Whilst the official data does make seasonal adjustments I have seen this miss fire before. Perhaps the clearest generic example of this is first quarter GDP in the United States which year after year has been lower than the trend for the other quarters hinting at a systematic issue.

House prices

If these have been leading the charge for UK economic growth then this morning’s news will disappoint.

House prices recorded their second consecutive monthly fall in April, while the annual rate of growth slowed to 2.6%, the weakest since June 2013.

The date is significant as it was the summer of 2013 when the Bank of England lit the blue touch-paper for UK house prices with a new bank subsidy programme. The latest version of this called the Term Funding Scheme has risen in size to £57.5 billion.since its inception last August. Looking forwards if we allow for the obvious moral hazard this is hardly especially optimistic.

As a result, we continue to believe that a small increase in house prices of around 2% is likely over the course of 2017 as a whole.

The GDP data

UK gross domestic product (GDP) was estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2017, the slowest rate of growth since Quarter 1 2016.

This was driven by the retail sales slow down and this.

Slower growth in Quarter 1 2017 was mainly due to services, which grew by 0.3% compared with growth of 0.8% in Quarter 4 (Oct to Dec) 2016……The services aggregate was the main driver to the slower growth in GDP, contributing 0.23 percentage points…….The main contributor to the slowdown in services was the distribution, hotels and restaurants sector, which decreased by 0.5%, contributing negative 0.07 percentage points to quarter-on-quarter GDP growth.

The services slow down will have had a big effect because it must be pretty much 80% of our economy by now. Officially it is 78.8%.

Actually much of the economy grew at this sort of rate.

Production, construction and agriculture grew by 0.3%, 0.2% and 0.3% respectively in Quarter 1 2017.

So a slowing on the end of 2016 but here is something to think about. UK GDP growth was 0.2% in the first quarter of 2016 so ironically it is better this year but also was 0.3% in 2015. Are we developing a similar problem to the US where it seems to be something of a hardy perennial situation and if so why?

Looking Forwards

As well as the more optimistic CBI retail sales report there was this from Monday.

The survey of 397 manufacturers found that domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

It is not the only body which is looking forwards with some optimism.

The UK economy slowed sharply in Q1, as signalled by PMI. March rise in PMI suggests Q1 GDP could be revised up from 0.3% to 0.4%………Note that Q1 GDP was based on a forecast of no service sector growth in March. PMI showed strengthening ( Chris Williamson of Markit ).

What about the individual experience?

We have settled on GDP per capita as a better guide and this was frankly poor this time around.

GDP per head was estimated to have increased by 0.1% during Quarter 1 2017.

This adds to an issue which the chart below highlights, guess which of the lines is our more recent experience?

For the people who think that their individual experience has not backed up the claims of improvement there is food for thought in that chart.

Is GDP underecorded?

Tim Worstall wrote a piece for CapX this week telling us this.

For it’s obvious to our own eyes, and when properly adjusted GDP shows it once again, that we’ve all got much richer these recent decades.

Okay why?

The CPI overstates inflation – and thus understates how quickly real incomes are rising……Of course the ONS and others do the best they can but the current estimate is that inflation is overstated by 1 per cent a year. Or real income rises understated by it of course.

There are some interesting points on goods which are free ( WhatsApp for example) and ignored by GDP.  However it completely misses out the cost of housing which in recent times has been a major inflationary force in my mind. Would you rather have housing or the latest I-Pad?

Care is needed as of course there were substantial gains in the past but on this logic we are all much better off than we realise. Really?

Comment

The issue with first quarter growth was also true across the channel as the expectation and then the reality show below.

with 0.6% growth signalled for both Germany and France ( Markit )…….In Q1 2017, GDP in volume terms* slowed down: +0.3%, after +0.5% in Q4 2016 ( France Insee ).

So as we note the Bank of France was correct we await the US figures wondering what it is about first quarter GDP? For France this is not yet a sequence as last year was better but the UK and US seem trapped in a mire that appears to have a seasonal reappearance.

Looking ahead we were expecting higher inflation to bite on real incomes as 2017 progressed. As we stand a little of the edge of that has been taken off that impact. What I mean by that is the rise of the UK Pound £ to above US $1.29 helps with inflation prospects as does the fall in the price of a barrel of Brent Crude Oil to below US $52 per barrel. Of course they would need to remain there for this to play out.

Some posted some Blood Sweat & Tears lyrics a while back and they seem appropriate again.

What goes up, must come down
Spinning wheel got to go round
Talkin’ ’bout your troubles, it’s a cryin’ sin
Ride a painted pony, let the spinning wheel spin

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6 thoughts on “What is it about GDP in the first quarter these days?

  1. I worry about the accuracy of such tiny percentages when measuring the economy and inevitably figures are revised up at a later date ( but largely ignored as the show has moved on ). I keep reading in the general press about the economy slowing down and consumers being squeezed due to the effects of Brexit and higher inflation. The elephant in the room that is the growth in unsecured credit is seldom, if ever, mentioned. From what I have read and from talking to the friends of my kids, credit cards and personal loans are at the maximum level and unable to be extended any further. I do wonder to what extend our recent GDP mini boom has been fueled by easy credit and if we are seeing this coming to the end of its natural cycle. I’m afraid most commentary in the mainstream simply repeat the established mantra and do not look into this in any depth.
    Car purchase appears to be no longer the norm and long term lease / purchase schemes are very much in favor however this would appear to encourage buyers to trade up in class of vehicle to a level that, had they had to purchase the vehicle, would have been unaffordable. Monthly payments will be stretching buyers and limiting the cash available for other discretionary spending.
    I don’t doubt that inflation and low pay growth play their part but the British consumer has a well established track record of boom and bust cycles using unsecured borrowings to fund their lifestyles.

    • Spot on Pavlaki we have an economy built on debt housing,cars,education.I suspect that the pension freedoms of 2015 get your money from age 55 was an attempt at keeping the economy afloat for a few more years rather than admit the economic policies of the last 30 have failed catastrophically.
      I keep banging on about the level of debt because it is unsustainable it doesn’t matter whether you are an individual or a business your outgoings cannot exceed your income on an ongoing basis.
      The public has been educated to believe ‘debt is good’unfortunately as you point out we are reaching our credit limits if interest rates rise there will be an economic meltdown,so they are being suppressed and the money supply expanded exponentially to fool the population that all is well.
      Inflation rising,wages falling,housing unaffordable for the young,pensions destroyed,manufacturing a shadow of its former self,the country drowning in debt but are being told to vote for ‘strong and stable Government ‘ if we had that we would not be in this mess,the evidence is clear that our economy has suffered from decades of criminally incompetent mismanagement ….this is beyond any argument in my humble opinion.

  2. I’m disappointed the savings that Carney and the free thinkers stole from my and many other bank accounts via TFS to hand over to credit card kings and queens has had such little impact and did not balance the economy.

    Will only give him a 5 out of 10 for this effort, though no doubt he will come back and surprise us all this summer with plan C or whatever letter they’re up to now.

  3. When 11% of GDP is imputed rents you’ve got a huge chunk of leeway in how accurate a representation of national output it actually is.

    That aside,having been on here for a few years,I know better than to rely on CPI/RPI/CPIH as a deflator.

    Ironic really that my enlightenment has thoroughly depressed me at times.

    • Hi Dutch

      Sorry about that. Of course the real shame is that we would do better if we had more honest figures and that would give things a more optimistic sheen. We do not have the latest imputed rental figures but just over a year ago we were told this.

      “Imputed rental represents around 10% of GDP as measured by expenditure.”

      I am not sure why they say expenditure because the money never actually exists and is therefore not spent but there you have it!

      Your comment made me think about the US ratio so I checked the US BEA website and it was 7.9% in 2015.

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