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How bad are the UK growth figures?

Gross Domestic Product (GDP) rose by only 0.2% in the first quarter of this year, compared with an increase of 0.4% in the previous quarter, according to the Office for National Statistics on Friday. This was lower than most economists expected.

The first reason why it may not be as bad as feared, is that the initial estimate for the last quarter of 2008 was only 0.1% and was eventually raised to 0.4% through subsequent revisions. This initial estimate is only based on approximately 40% of the raw data.

The recent trend in GDP can be seen in the graphic below.

Real GDP Quarterly Growth Source: ONS

The other reasons for guarded optimism come from a more detailed analysis of the breakdown of the GDP figure. According to the ONS, “The decrease in the growth rate was due to weaker growth in services.” In fact, services output rose 0.2% in the first quarter of 2010 compared with 0.5% growth in the previous quarter. However, the largest contribution to the weaker growth was from the distribution, hotels and restaurants sector, where there was a fall of 0.7% compared to a growth of 1.9% in the previous quarter.

Why did this sector fare so badly? It was down to all that white stuff which kept coming down in January. The snow kept people at home and out of the restaurants. Business meetings were cancelled and along with them, hotel rooms. Also, Simon Hayes of Barclays Capital has noted that petrol sales fell by an amazing 14.9% in the first quarter, because many of us were not going anywhere in our cars. With any luck we won’t have snow this summer, although you can never tell in the north-east, and the GDP figures will improve.

If the damage to this sector was a one-off, then we also have to take into account the raising of VAT back up to 17.5% at the beginning of January. This too may have reduced consumer spending but will not necessarily have an ongoing impact as VAT was only at the reduced rate of 15% for 13 months.

What may give some reason for optimism is the fact total production output rose by 0.7% in the first quarter of this year, largely due to the energy sector, but also manufacturing output rose by 0.7% following on from an increase of 0.8% in the previous quarter.

The prospects are not as bad as the initial GDP figure suggests and we can probably expect an upward revision over the next couple of months. But that may be too late to save Gordon.

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Posted in economic growth, GDP, Manufacturing, production, Service Sector

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