Q4 2010 GDP release has been described in the press as a “shocking contraction”. According to the ONS the bad weather at the tail end of 2010 provided the economic headwinds resulting in the unexpected contraction. The policy divide in BOE articulated by, messrs Posen and Sentence provides an interesting subplot to the disappointing results. The divide amongst the BOE policy is whether to support growth (Adam Posen) or fight the threat of inflation (Andrew Sentance).
Chart.1 Q4 GDP declines Chart.2 Annual Growth Rate Slows
Chart.1 highlights the recent blimp in sequential QoQ growth in UK GDP. If the weather had been normal, the ONS points out that GDP will be “flattish as opposed to declining’’. Chart.2 depicts annual growth rate in GDP and the strong V-shaped recovery. Economic activity peaked in Q1 2008 and reached its nadir in Q3 2009.
According to the ONS the biggest contributors’ of negative growth for Q4 2010 were the construction and business services & finance sectors. However, the Q3 2010 growth rate of 0.7 was attributed to the construction and government sectors.
Chart.3 GDP and Components
Chart.3 above highlights the GDP and sector components on a current market value basis, rebased to Q1 2008(peak in GDP). Most evident is the rise in growth from the government sector at the end of Q4 2008, due to the fiscal stimulus. In addition, the precipitous decline in manufacturing and construction activity was followed by strong rebound in these sectors. These two sectors have been supportive to the economic recovery that began in Q3 2009. Construction sector growth is showings signs of waning and may become less supportive to economic growth. However, most sectors except for the government activity are below pre-recession levels.
Due to the impact of bad weather on GDP it is difficult to assess whether the recovery in economic activity has indeed slowed down. We suggest a wait and see approach with respect to assessing the trend in GDP. The ONS estimate of flattish growth is a cause of concern. This may indicate to early of deterioating strength in the recovery of domestic demand. Furthermore, the austerity measures will signal the end of the government’s fiscal stimulus. The absence of support from the government sector may impair the fragile economic growth.
The latest GDP figures added to the uncertainty about the fragility of the UK economic recovery. Without an established downward trend (and potential upward revisions to Q4’10 figures), latest results are not expected to have a significant impact on the course of house prices. Also see http://wp.me/pTU04-46