5th June 2013
Henderson’s chief economist Simon Ward says that its out-of-consensus forecast that UK GDP will grow by 2% in 2013 is supported by today’s upbeat May purchasing managers’ survey reported in the Guardian among other papers, for the dominant services sector, following encouraging results for manufacturing and construction earlier in the week.
Ward points out that a weighted average of new business indices from the surveys is now at a similar level to mid-2009, which came ahead of a 2.4% rise in GDP in the year to the third quarter of 2010 (2.6% excluding oil and gas extraction).
The current economic pick-up was predicted by faster real money supply expansion during 2012, with narrow money M1, in particular, surging since last summer. M1 – comprising instant-access deposits and physical cash – is a measure of the demand for money for use in economic transactions yet is ignored by the Bank of England and private-sector economists.
He says the forecast of 2 per cent annual average growth rests on the following three factors.
1) Likely upward revisions to earlier GDP data that will increase positive “carry-over” to the remainder of 2013. First-quarter GDP is currently estimated to have been only 0.4% higher than the 2012 average but this may rise to 0.8% as the Office for National Statistics incorporates additional information*.
2) Indications of a bumper rise in GDP in the second quarter. The March level of GDP was 0.3% above the first-quarter average and the second quarter should receive a significant boost from a recovery in construction output from weather-driven weakness. With the PMIs signalling further gains in services and manufacturing output, GDP could rise by 0.8-0.9% on the quarter.
3) Probable continued solid growth during the second half, based on current expansionary monetary conditions. The previous two assumptions imply that GDP growth of 2.5% annualised between the second and fourth quarters would be sufficient to produce 2% growth for the year.
Ward adds: “Survey confirmation of the upbeat economic outlook signalled by monetary trends ought to cause the three MPC doves to back down on their call for further easing, assuming that this recommendation is based on data analysis rather than neo-Keynesian dogma. Mark Carney’s February assessment that policy was already sufficiently loose for the economy to achieve escape velocity has proved correct, suggesting that he will enter office with a neutral bias.”
*This assumes that quarterly GDP changes since the start of 2012 are raised by 0.18 percentage points from their initially-reported values, consistent with the average upward revision over 2009-2011.