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It was worse than we thought

Yesterday the ONS produced revised figures for GDP growth in the first quarter of 2009. Their original estimate had been that GDP fell by 1.9% but this has now been revised downwards to 2.4%. This was the biggest quarterly fall for 51 years.


It is reasonable that revisions have to be made retrospectively, but we are not used to such large revisions. The ONS explains that when it made its preliminary estimate in April, this was based around 45% on actual data and the rest on modelling. Now, they say that around 85% of this current figure is based on actual figures as more, and better, information has come in.


What does this additional information show? It shows that output fell by 4.9% during the first quarter of 2009 compared to the same quarter last year – and that this is the biggest year-on-year fall ever recorded. On top of this, the ONS has had to revise even earlier GDP figures, as shown in the graphic below, which shows that the recession actually started in the second quarter of 2008, which means that we have now experienced four quarters of negative growth.

Source: ONS

Source: ONS


The reason for the revisions was largely due to underestimates of the fall in construction. This now shows that the sector was hit harder than expected, and that construction output fell by 6.9% in the first quarter, compared to the initially reported figure of 2.4%. On top of this, output of the service sector declined by 1.6% rather than the 1.2% fall which had been reported earlier.


Other news included the fact that gross fixed capital formation which measures firms’ investment in machinery and buildings was down 7.5%. Also, inventories, which measures companies’ stock levels, fell by £5.4bn in the first quarter.


So what does all this mean for the economy and its probable recovery? It certainly seems to suggest that the government will not meet its target of a 3.5% decline in the economy for the whole of 2009. Although the Chief Secretary to the Treasury said that they will not be revising their forecast downwards.


It may alter the shape of the recovery. Economists are divided as to whether we will have a V-shaped recovery, or it could it be W-shaped with a double dip, or U-shaped or L-shaped. I blame the relaunch by Heinz of its Alphabetti Spaghetti in 2005. It basically means that everyone is guessing.


What we can affirm is that manufacturing output grew in March and April, albeit slightly, and the much respected National Institute for Economic and Social Research claimed that the economy had begun to resume growth in April. Also, the Nationwide Index showed that house prices had risen in May. On top of this, the continued fall in inventories mentioned above, surely means that companies will have little further slack, and will be forced to begin increasing output and eventually investment in the months ahead.

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Posted in economic growth, GDP, Investment, Minimum Wage, recession

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