Posted by

Steve Hughes, Senior Economic Adviser

20 Apr 2012

As GDP in the last quarter of 2011 recorded a contraction, the numbers will tell us if the UK has entered a technical recession. We already have an indication of how the economy performed from several business surveys and other sectoral indicators from the ONS. So far, these have mostly pointed towards modest growth in the first three months of the year, and the retail sales figuresreleased this morning support this. Why then, have some doubted whether growth will be achieved? The answer lies in the ONS measure of construction output, and how weak numbers from this sector can weigh down on the overall growth figure.

Construction data for the first two months of 2012 have been very weak, and the way the numbers stack up when building the GDP estimate mean that even if there were a massive boom in construction activity in March, it would still be likely that this sector would act as a drag on growth. If this downward pressure outweighs the growth in other sectors then the GDP number will be negative; ergo, the UK will be in recession.

This naturally leads to the question of why the construction industry is in such a parlous state? And while it is certainly true that the BCC’s membership tell us that firms in construction supply chains are suffering more than in other sectors, when discussing this topic another factor needs to be thrown into the mix. The Bank of England’s Monetary Policy Committee released the minutes of its April meeting this week, which contained the following text:

“For the second month in a row, the ONS had reported a particularly large contraction in construction output, which it estimated to have fallen by around 12% in each of December and January……..This was at odds with other indicators of construction activity from CIPS/Markit, Experian and the Bank’s Agents, which had generally pointed to much smaller declines around the turn of the year…….In the absence of revisions to the latest vintage of data, the contraction in measured construction output was likely to depress measured GDP growth significantly in the first quarter.”

In other words, the ONS figures differ from the other evidence that we have. The key phrase here is “in the absence of the latest vintage of data”, and is a nod to the simple fact that when ONS provides certain information it is often not the full picture. Take the GDP figure we will get next week as a prime example, it is a first estimate, and only contains around 40 percent of the data that will be included in the GDP estimate for the same quarter a year later, with the 60 percent gap in knowledge is filled by forecasts of economic activity.

This may seem strange to some, but the policymakers using the data to better understand the economy look at it in the knowledge that it is more than likely to be subject to revision. A perfect example of this would be that the ONS originally stated that the Q3 2009 GDP number was negative (-0.4%), which at the time took the length of the recession to six quarters. As more information came in, revisions occurred, and now the Q3 2009 GDP number is estimated to be 0.2%, taking the length of the recession down to five quarters (it is important to also note that the Q2 2008 GDP number was originally positive but revised down to be negative). The point of this is that GDP can get revised up or down, as shown in the graph below.

So, So, all of this leads us back to the construction numbers which could depress GDP, but are also subject to revision themselves. It is worth noting that the ONS has previously conducted an investigation into its construction calculations following some results that appeared to be out of kilter with other evidence, and also released some miscalculations of the same publication in the same year. 

The intention of this blog post is not to criticise the ONS, but to simply point out that when reporting on data it is imperative to understand what story the data is telling, and that the vagaries of calculating an early GDP estimate creates some issues. And here in lies the problem with Wednesday’s results. There is no doubt that if the number is negative then the  twenty four hour news cycle will go into overdrive leading to headlines proclaiming economic Armageddon. In reality, the underlying problems facing the UK economy and business community will be no different if the number is either positive or negative, and the underlying problems will still be no different following the undoubted revisions to the number that will occur later on down the line. In a nutshell: context is everything.