The Office for National Statistics (ONS) published its initial forecast of GDP for the third quarter of 2009 on Friday. With most forecasters anticipating the end of the recession, there was considerable disappointment that the economy has now been contracting for the past 18 months.
For the record, the Construction Products Association published its latest detailed forecasts a couple of weeks ago and expected growth in the second half of the year, but not in Q3. With stocks at relatively low levels and increased spending due to consumers taking advantage of the lower VAT rate before it rises on 1 January 2010, GDP should grow in Q4.
We need to be a little careful of being too despondent about the Q3 figure. First, whether it is a slight negative or a slight positive makes relatively little difference to the overall state of the economy. The word “recession” is a key trigger point for consumer confidence, but unemployment is still expected to keep rising till the middle of 2010 as it lags economic activity and that is probably more important for consumer confidence.
Furthermore, the margins of errors in the ONS' first estimate are quite high. A quick test of its accuracy is to look at the relationship between the GDP first estimate and the final value over the past 10 years, using the correlation coefficient. If they are perfectly related then the coefficient is 1; if there is no relationship then it is 0. The relationship between them is in fact only 0.1...
So what does the figure mean anyway? Well, not that much if truth be told. The economy is still relatively subdued, but the rate of decline has slowed considerably since Q1. That is about as much as we can say on the basis of the Q3 figure.
As I said, we forecast growth in the final quarter of the year, but this is mainly expected to be bringing forward spending from early next year that would have occurred anyway. It is perfectly possible that in 2010 Q1, with higher VAT acting as a disincentive to spending, and higher unemployment leading to lower consumer confidence, GDP could fall again next year, the dreaded “double dip”.