"Recession here we come, a snow-dabbed double-dip" tweeted
"http://twitter.com/faisalislam?from_source=onebox">Faisal Islam, Channel Four’s economics editor. He summed up much of the hysterical reaction. It may spoil a good story, but here is what I
suspect the broadcasters won’t tell you today.
1. Erratic GDP swings are common when recovering from a recession. Remember how stunned everyone was with the surging quarter three data? Now, we’re all shocked by plunging quarter
four figures. I’d advise CoffeeHousers to treat these two imposters just the same. After the 80s recession, quarterly growth rates swung between -0.7 percent and 1.5 percent. Following the
ERM-induced recession in the 90s, growth rates swung between -0.2 percent and 0.5 percent. A swallow does not make a summer. A quarter of contraction does not make a double dip.
2. The GDP data doesn’t square with the many other indicators of economic recovery, all of which are reasonably strong. And the
"http://www.nationwide.co.uk/NR/rdonlyres/FCF6B4AC-AE77-4EE2-BB92-C70F194140C7/0/ConsumerConfidenceDecember2010.pdf">Consumer Confidence Index was up 8 points in December, and the monthly
claimant unemployment count fell by 4.1 percent to 1.46m (Table 10).
3. The cuts haven’t started yet. Balls says today that "cuts which go too far and too fast will damage our economy". He’s hoping that no one will look up the facts
(table PSF3) and see that state spending was up by a staggering 5.2 percent in December year-on-year, and 5.2 percent Q4 2009 vs Q4
2010. Any attempt Balls makes to link cuts to economic contraction will be demonstrably spurious. And, I feel sure, immediately challenged by BBC presenters.
4. The ONS itself has slapped a major health warning on these figures. Even on a good day, the GDP data is prone to embarrassing revisions. Britain ground to a halt a month ago -
not enough, in itself, to explain why the City consensus forecasts were so badly out. But the City needs to forecast a broadly linear trajectory – the reality is a zigzag. (See below)
The gulf between the linearity of expectations and the zigzag nature of economic recoveries makes plenty room for mischief. But Balls knows all of the above better than anyone in Whitehall. I doubt
he’ll make too much of this – knowing there may be a helping of humble pie to come when the quarter one data comes out in April.
5. Forecasts for 2011 are all of steady economic growth – and most around the UK trend growth of 2 percent. The below graph shows where the 20-odd economic forecasters,
monitored by the Treasury, think that growth will end up this year (Page 16). The time to get nervous is when analysts –
having seen all the data – downgrade expectations.
The City reaction is very sceptical. "These figures are staggering, and scarcely believable," said Andrew Goodwin from Ernst&Young’s ITEM Club. Ed Balls is about to appear on BBC2′s
Daily Politics Show; there will be a huge temptation to overreach himself and make some apocalyptic predictions he may soon regret. I suspect Balls himself doesn’t believe these figures, but that
won’t stop Labour having lots of fun today.
We are living in unpredictable times. I can’t think of the last time the City’s forecast for GDP growth was so stunningly out of kilter with the result. This could be due to ONS error,
but Osborne would be ill-advised to forecast a bounceback in Q1. He knows that if he does, and if the economy is still shrinking, it will meet the technical definition of “recession”
and Balls’ double-dip prophesy will have come true. The relationship between various economic indicators is changing. As JK Galbraith so rightly said, the only function of economic
forecasting is to make astrology look respectable. So the moral is to take all data – including today’s – with a large pinch of salt.