4th July 2011 by Simon Ward
A Sunday Times story claims that “fears over the strength of Britain’s recovery are growing” and “City forecasters now believe the economy will expand by as little as 0.3% between April and the end of June”. A 0.3% rise in GDP in the second quarter would actually represent a strong performance given the drag from the additional bank holiday in April.
The suggestion of a sub-par second-quarter number is not new. The Bank of England appears to have assumed an increase of only 0.3% in its last Inflation Report, prepared at the start of May. The preliminary estimate is released on 26 July.
A similar distortion to the figures last occurred in the second quarter of 2002. The usual May bank holiday was replaced by a two-day holiday in early June to celebrate the Queen’s Golden Jubilee. The Office for National Statistics (ONS) estimated that the change depressed second-quarter GDP growth by between 0.2 and 0.7 percentage points. Assuming a similar impact, a 0.3% GDP rise in the second quarter would imply underlying growth of between 0.5% and 1.0%.
A monthly GDP estimate based on output data for the services, industrial and construction sectors (99% of the economy) fell by 2.1% in April, the largest decline since a 2.2% drop in June 2002 – see chart. If GDP recovered to its March level in May and June, the quarterly rise would be 0.6%. The March reading, however, was probably inflated by catch-up activity after bad weather disruption in December and January. The suggested 0.3% second-quarter increase, therefore, looks plausible.
The holiday effect will reverse in the third quarter. In 2002, the ONS estimated that reported third-quarter GDP growth was boosted by between 0.4 and 0.7 percentage points. Assuming underlying expansion of 0.5% in the current quarter, this suggests a reported GDP increase of between 0.9% and 1.2%.
Pessimistically-biased media commentary is adding to market fears that a dovishly-inclined MPC will launch QE2, sending sterling down the slipway.
To receive our free weekly email sign up here.