It’s not all doom and gloom

Nov 3 2009 Sarah Green, The Journal

A WEEK ago, figures released by the Office for National Statistics showed the UK economy contracted by 0.4% between July and September – meaning that the country remains in recession.

Along with most others, the CBI had been hoping that GDP would post a modest increase in the third quarter. In the event, the official figures suggest that it was only a little less bad than the second. Why did just about everybody get it wrong?

Industrial production figures for August had already shown that manufacturing was still having a tough time. But the big surprise was that output in the services sector was also noticeably weak – in marked contrast with the business surveys. Some sluggish signals had been picked up from the hospitality sector, but CBI surveys on wholesaling and motor trade pointed to a better outcome than actually showed up in the data.

There is the chance that this first take on the third quarter will turn out to have been too gloomy. Around three-fifths of the numbers in the preliminary assessment are based on estimates.

We might get a better feel for all this on Thursday, when the Monetary Policy Committee announces its decision for November. The MPC will have completed the analysis for its quarterly inflation report, due to be published on November 11 and its decision on whether to announce a further increase in the Quantitative Easing programme will help to indicate whether it thinks these GDP numbers really are bad news.

But there are still some strong headwinds out there as well. Bank loans to private non-financial companies fell in September, and companies raised much less money on the capital markets in the third quarter than they did in the second. And there remain big uncertainties about the timing and shape of the big fiscal consolidation that is inevitable in the next few years. The construction sector is especially anxious about the outlook for public sector contracts in the years ahead.

The story elsewhere is more cheerful. The world’s largest economy reported a strong rebound on Thursday, with annualised growth in the US running at 3.5% in the third quarter. And the Eurozone produced a range of mainly positive indicators.

The world is not yet out of the woods, and all these numbers are still being powered by fiscal stimulus. However, despite the disappointing nature of the most recent figures, things look a lot less gloomy than they did six months ago.

Sarah Green is regional director of CBI North East