UK GDP: how bad was 2011?

GDP is estimated to have been 0.5% below its third-quarter level in October, based on today’s news that services output fell by 0.7% between September and October together with earlier reports of changes of -0.7% and +0.6% in industrial production and construction output respectively. A quarterly fall in GDP, nevertheless, is not a done deal since monthly statistics are volatile and often revised heavily. The services PMI business activity index rose from 51.3 in October to 52.1 in November, suggesting a rebound in output.

Taking a step back, a 0.25% decline in GDP in the fourth quarter would imply full-year growth of 0.9% in 2011 – very disappointing relative to a consensus expectation of 2.1% at the start of the year. There are, however, two important qualifications.

First, part of the shortfall reflects a decline in North Sea production that should arguably be stripped out in assessing underlying economic performance. Gross value added excluding oil and gas is on course to rise by 1.3% in 2011 assuming a 0.25% fourth-quarter decline.

Secondly, there were two fewer working days in 2011 than 2010 – 251 versus 253, with one of the lost days due to the additional Royal Wedding bank holiday*. GDP statistics do not adjust for working days, implicitly assuming that lost output is recouped within the quarter or year. On an alternative assumption – admittedly equally arbitrary – that each lost working day leads to a permanent half-day loss of output, GDP growth in 2011 was depressed by about 0.4 percentage points (i.e. one day as a percentage of 253), implying a “true” rate of expansion of about 1.3%, or 1.7% excluding oil and gas. (The effect turns positive in 2012, when there are 252 working days despite an additional bank holiday to celebrate the Queen’s Diamond Jubilee.)

*The number of working days in 2011 was the lowest since at least 1967, according to the website There have been two previous years since 1967 when the number of working days fell by two – 1977 and 2005. In both cases, GDP growth was lower than in the prior and following years.

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