Bill Jamieson: Construction reaches tipping point

Back into recession – or so the statistics say. But are we really? In politics, the figures mean everything; in economics, they deal another blow to confidence. But what do these figures really mean? Are they credible and trustworthy? What policy changes need to be made, if any? And is the economy in Scotland suffering a similar relapse?

Let’s start with the credibility of these statistics. For more than a year, argument has raged over the reliability of the official figures for the construction sector. This matters, because it was a 3 per cent fall in construction output in the first quarter that pulled Gross Domestic Product into negative territory: a decline of 0.2 per cent overall.

Now a 3 per cent fall in construction is significant on any measure. It would reflect, of course, a winter period where bad weather can typically halt work on construction sites for days, if not weeks on end.

But here’s a funny thing. One of the remarkable features of the first three months of this year was the mildness of the weather and the small number of days when building work was disrupted by snow and ice. In fact, the records show that in the first quarter, the UK mean temperature was 1.6 degrees above the average since 1971. There was also relatively little rainfall that would have disrupted building activity. Allowing for this mildness, the state of the UK construction sector must therefore have been truly dreadful. So, how, then, did it compare with the first quarter a year ago, when the UK suffered one of the worst winters since 1947?

Over the same period last year, the Office for National Statistics first estimated the fall in construction activity at no less than 4.7 per cent. However, that was not the final word from the ONS – far from it. The official revised estimate now puts the fall at just 1.5 per cent. Put another way, the ONS is now asking us to believe that the fall in construction in the first quarter of this year was twice as severe as that during one of the worst weather quarters for more than 60 years.

Similar statistical aberrations have blighted the figures for Scottish GDP, with remarkably large swings in construction sector readings.

This does not negate the fact that times are tough for the construction industry. But just how tough? We have a right to ask, given the variability in these preliminary readings and the size of the subsequent revisions. And we have a special urgency for asking, as the answer (and these later revisions) may well show that the UK economy may not, in fact, have been “back in recession” after all. And that is particularly important now, given that a negative reading may impact on the UK’s credit rating.

In politics, these numbers are everything. The Labour opposition lost no time in blaming the Westminster coalition’s “austerity” policies and branding its economic strategy a failure. The political problem for the Prime Minister David Cameron and his chancellor George Osborne is that they cannot with credibility turn round and question the statistics. This would be laughed off as just another lame excuse. And it would also open the administration to the charge of failing to attend to the problem of questionable statistics much earlier. However, there is little it may have been able to do as the ONS is not under government control and the responsibility for the credibility and reliability of its statistics lies with parliament.

It would also be unfair to heap all the responsibility for this dismal GDP showing on a dodgy “flash estimate” from one rather volatile sector accounting for just seven per cent of the UK economy. Industrial production fell by 0.4 per cent quarter-on-quarter and the services sector, accounting for some 70 per cent of the economy, managed a gain of just 0.1 per cent. These, too, were disappointing – and also at variance with private-sector business survey evidence which indicated more positive readings.

Normally, a poor reading on official figures on the economy would act as a trigger for business organisations to claim “I told you so” and calls for immediate action to cut taxes and slash red tape. But it was interesting to note yesterday the dogs that didn’t bark.

From Liz Cameron, chief executive of the Scottish Chamber of Commerce and no mean barker, came the following: “This negative picture of the first three months of 2012 is not one that we recognise in Scotland, either in the Scottish Chamber of Commerce’s recently published business survey or in a host of other Scottish surveys published over recent weeks. We suspect that the Scottish economy has not suffered in the way that the rest of the UK has suffered and we are optimistic that the official Scottish GDP figures for the first quarter… may reveal a more positive situation north of the Border.”

In fact, since the start of the year the Bank of Scotland’s Business Monitor has been showing improved readings, particularly on private-sector staff hiring. And for good measure the Confederation of British Industry industrial trends survey for April indicates that manufacturing activity got the second quarter off to a decent start. Both the export orders and the overall order readings are well above long-term averages. And a balance of 24 per cent of companies said they expected to raise output over the next three months.

It is certainly true that the UK economy has been struggling. But we have long known that recoveries from recessions caused by financial crises take considerably longer than those from “normal” cyclical downturns. It may be three years or more before output is back to the pre-crisis peak level of 2007-8.

For thousands of businesses, the GDP numbers mean nothing and change nothing. They know conditions are tough and that household incomes and domestic spending are under the cosh. They will battle on and in due course turn the business cycle, as they have always done. It is the number of labour hirings that matters, not first-shot, stab-in-the-dark GDP statistics vulnerable to big revision.