Fortnightly insight into the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.
See: www.strategiceconomics.co.uk
At the end of the first month of each quarter, usually on the last Friday in the month at 9.30 a.m., there is a great ‘brouhaha’, especially in the London financial City and the Westminster politico-media village about the release of the first estimate of real GDP for the previous quarter. (N.B. the word real is important. Most commentators will talk about GDP without that word in front of it, but we should remember that the effects of inflation have been taken out of the figures.) So, on 25th January, we had the first estimate for the fourth quarter 2012 (October-December): a 0.3% real decline in economic activity from the previous quarter. Why all the fuss over such a small number?
There are several reasons why too much fuss is made. First, the focus of the first release is on production, but the ONS does not have all the numbers it needs, particularly about December. For example, it does not yet have all the trade (export and import) figures for the last month. It cannot check its statistics against incomes data and it has less than complete expenditure figures. The real GDP first release is a guesstimate. Against that, the ONS has been doing this “backcasting” for many years. It can pick up a variety survey and anecdotal signals as to what has been happening, especially around Christmas. The ONS has learned how to guess fairly well.
Second, ONS are using large but incomplete samples, which vary from period-to-period. They may not be really comparing like-with-like over the years. Just by considering the growth in internet-retailing, the spread of smart phones and one-off factors like floods or Jubilees, we can see that real GDP has a different composition in 2012 than it did previously. In mitigation, these ‘basket’ changes do get recognised in periodic revisions. It’s not perfect but it’s reasonable.
Third, the numbers themselves do not tell us what is happening right now or in the future. Planning policy, financial investment or business decisions on the latest GDP release alone makes no sense. We call it “driving by looking in the rear view mirror” – very dangerous when you are approaching a bend. Yet, just this week, we’ve had lower than expected US real GDP figures leading to a fall in stock markets in Japan. Sure, share prices came back later in the week when investors looked at the detail. But, isn’t it odd that these first estimates are seen as so important as to move millions of investor dollars? Of course, the reason is there’s nothing else to go on. If real GDP falls at the end of 2012 and we can see where it fell, it does tell us something about the likely direction going into 2013. A fuzzy picture may be better than no picture – some knowledge better than no knowledge?
Fourth, the numbers are revised quickly. At the end of February, we will get a second UK estimate and at the end of March a third much more comprehensive set of statistics. Really, the latter is the one that should get all the attention, but it never does. Luckily, the near-term revisions are not usually big. (For example, the decline in the second quarter of 2012 turned out to be not quite as bad as the first estimate suggested but it was still bad.) Even then, however, there are more revisions to come. It will be a few years before we have a definitive view of what UK output really was like at the end of 2012 and we will never get rid of all elements of statistical judgement.
And that’s the rub. When we have the most reliable numbers, it’s too late. The markets, the politicians, the media and the businesses need some knowledge of what the economy is like now. Therefore, they grab hold of what is available even if it’s not totally reliable. As the proverb says, “in the land of the blind, the one-eyed man is King.”
So, what did we learn from the latest release.Well, as we said, there was a small decline in real GDP (-0.3%) in the final quarter of 2012. More importantly, the UK economy was flat (zero growth) in 2012 as a whole. The output level remained below its pre-recession peak (3.2% at the end of the year) – the downturn will reach its fifth anniversary at the end of this quarter. Finally, there was little or no sign of industrial rebalancing in 2012. The sector breakdown of trends is revealing: last year, government and finance were still the fastest growing parts of the economy and the production sectors were still falling.
The message for the early part of 2013 is that there is a lot of ground to be made up before we can suggest the economic malaise is over. The rising stock markets are signaling that an upturn may be coming … but not soon.
Now, I hear you saying, “when is he going to get to Dorset?” I think the point is that when national real GDP is so weak, it is virtually impossible for Dorset to ‘buck the trend’. There are particular aspects of our economy that shift the balances somewhat – such as an industrial structure that has strengths in aerospace and financial services around East Dorset, an income structure that includes a high proportion of fixed income, wealthy and ageing people throughout the county, and a labour market that is flexible but, in parts, suffers from skills gaps.
There will be some Dorset companies, perhaps supplying niche overseas markets with unique, innovative products that are doing really well. There will be some manufacturers, with good order books, that are confidently planning to invest for future growth. There will be some construction companies enjoying a better start to 2013 than 2012. There may be some tourism activities planning for less rain and more visitors in the summer. There will be some business services that thrive no matter what stage we are at in the cycle.
Nonetheless, overall, we are on the same island as the rest of England. With household and other budgets still under pressure, most Dorset businesses face another year of competitive business conditions.
Professor Nigel Jump, 4th February 2013