UK growth: no reason to downgrade 2011 forecast

Some economists have revised down their 2011 GDP growth forecast in the light of the 0.6% fourth-quarter fall. This is questionable. To the extent that last quarter’s decline was due to December’s bad weather, the effect will be to shift production from 2010 to 2011, resulting in faster growth this year.

The Office for National Statistics estimates that the weather effect reduced GDP by 0.5% in the fourth quarter. This implies a negative impact of 0.125% for the year as a whole. Assume that two-thirds of the production shortfall is recouped in 2011, with the remaining third representing a permanent loss. The net effect would be to boost annual growth between 2010 and 2011 by 0.2 percentage points (offset by a 0.125 point reduction to 2010 expansion).

The economists, presumably, are revising down their 2011 growth forecast because underlying GDP performance was supposedly weak last quarter, with this negative surprise outweighing the positive arithmetical impact of the weather disruption. The view here remains that the ONS estimate of a 0.1% fall in weather-adjusted GDP is too pessimistic – either the 0.6% headline decline will be revised up or the negative weather impact was significantly larger than assumed.

Job vacancies are typically a good coincident indicator of GDP. The Monster index of online job postings rose to a new post-recession high in January, suggesting a solid underlying economic recovery – see first chart. (Confirming the improvement in labour demand, the Reed job index – more timely but with a shorter history than the Monster index – surged in February.) An indicator based on changes in claimant-count unemployment gives a similar message – second chart.

Monthly GDP rose by 3.6% in February and March 2010 following a snow-related 1.5% drop in January. A similar or larger rebound is likely following December’s 2.0% decline, implying first-quarter GDP growth of more than 1% (assuming no upgrade to the current fourth-quarter estimate). With monetary trends looking more promising, the forecast in a previous post of GDP growth of about 2.5% this year is maintained.