Comment: Is GDP figure just a flush in the pan?

CONSTRUCTION in Scotland could be taking off at last. On the edge of Loch Lubnaig, just north of Callander, the finishing touches are being put to a giant concrete cludgie. It is way behind schedule and has missed the peak tourist season.

Bill Jamieson

Work has been fitful. Freezing weather held up building for months while the heat of recent weeks slowed proceedings. It is no thing of beauty. Local opinion is split as to whether it is an asset or liability. But the earth-movers are off-site and the “visitor facility” comprising toilets, picnic area, car parking, small retail kiosk and fresh water supply, should be formally opened in the next few weeks. Progress!

Might the concrete cludgie be a metaphor for “escape velocity” in the construction sector? Last week’s GDP numbers certainly suggest a mighty flush. Construction grew by 0.9 per cent quarter-on-quarter – a massive turnaround from the 8.3 per cent plunge recorded last year.

By turning from a mighty minus to a positive plus, construction helped push overall growth up to 0.6 per cent in the April-June period, double the rate in the previous quarter and the strongest year-on-year improvement since the first quarter of 2011.

But several questions are begged here. First, given the remarkable volatility of statistical revisions, how reliable is this pick-up? Second, will the construction uplift be sustained at this pace? And third, given that we still have no recovery in investment spending, no overseas trade revival and no real “escape velocity”, what forward guidance on interest rates can we expect from the Bank of England?

Two announcements are due. The first, on Thursday of this week, is likely to see interest rates held at 0.5 per cent. The second, on 7 August, with the publication of the Bank’s authoritative Inflation Report, will bring the first detailed statement about forward guidance on monetary policy. This will give greater clarity on the Bank’s policy thinking, whether there should be further stimulus and if so, how much and in what form.

So the Monetary Policy Committee will be submitting the latest GDP numbers to intense scrutiny. As well it might. For the figures do require considerable caution as to what they tell us about the real state of our economy.

It seemed only yesterday that we were agonising about a triple-dip recession. But the triple hasn’t materialised and the second, according to the statisticians, never happened. Instead, there was one long dip that was larger than previously calculated, leaving output 4 per cent below its pre-crisis peak rather than 2.5 per cent below as previous data indicated.

This was due to an under-estimation of the price inflation of investment goods. Whether this will prove the end of revisioning is anyone’s guess.

At any rate, we should be wary of taking the first estimate of GDP performance as the final word. Previous GDP figures were depressed by low estimates of North Sea oil output. And numbers for the construction sector have proved particularly erratic and liable to alteration. So is last week’s GDP announcement definitive proof of a turnaround? “It is futile”, cautions Monument Securities economist Stephen Lewis, “to debate whether the 0.6 per cent quarterly growth in GDP represents a broadening of the recovery … The data do not admit of such fine judgments.”

As for construction in particular, there may well be, he adds, scope for this component of output to rebound in the second half of the year. But for GDP overall, year-on-year growth is hardly likely to sustain Q2’s 1.4 per cent rate because the statistical base effect will be less benign: the comparison will be with a period when GDP was boosted by the Olympic Games. Thus, he concludes, “it seems unlikely that year-on-year GDP growth for 2013 will much exceed 1 per cent”.

However, this should be of help to the Chancellor as the budget projections for the public finances were based on markedly lower growth forecasts. A higher out-turn, bringing with it higher revenues by way of business tax and employment tax receipts and a lower than provisioned rise in welfare costs, augurs well for a sharper fall in the budget deficit than forecast. But there are still, of course, miles to go.

For the Bank, a more cautious reading of the GDP flash estimate is likely to keep monetary policy looser for longer. We are well away still from firm evidence of the sustained recovery required for Bank Governor Mark Carney and the MPC to be confident about any upward move in interest rates. Thus, while a decision on further money supply boosting (quantitative easing) is likely to be kept open for now, the steer we could well get from that forward guidance is that interest rates will not be rising for some considerable time. This, says Global Insight economist Howard Archer, should “help keep gilt yields down and will also encourage businesses and consumers to invest and spend more through providing greater certainty that their borrowing costs will not be increasing any time soon.” He expects interest rates will be kept at 0.5 per cent until at least the second half of 2015.

That in itself would mark a truly extraordinary period in the history of the UK economy. Interest rates have never had to be kept at such a low rate for such a long period, testimony to the depth of the recession.

But it should give the construction sector some confidence about the interest costs of those larger projects we need to see. We are certainly going to need more than that concrete cludgie for that grand ribbon-cutting ceremony called “escape velocity”.

Twitter: @Bill_Jamieson