So a contraction in the economy of 0.5% in the final quarter of 2010. Not so good.
The -0.5% was put down to the weather by our politicians – but surely the weather would have caused a bigger problem? In the three months there were around 63ish working days, and I guess in total we might have lost 1 working day (maybe a lot more). Do the math (or sums if you are british) and you get 1.5% of missing work days. With recent GDP positive territory being fractions of a percent this rough calc seems like a pretty significant margin of possible error. Even if the missing working days is 0.5days you still get 0.75%. So the GDP figure should have been much worse IMO. That crude calc makes me think that the weather discounted figure from the ONS of 0% growth is too low, by at least 0.25%. OK I’m not an economist and I know nothing of how they really calculate GDP – but I’m guessing we’ll see an ONS upward revision sometime soon.
As for the outlook for the first q of 2011 I suspect a return to GDP growth would have been on the cards apart from the rather unfortunate bump in VAT to 20%. A bump that all the parties knew was required before the election (they just didn’t dare discuss it). Increased taxes take demand out the economy – and when your dealing with the thinnest of GDP fractions the VAT hike is bound to have an impact. So will GDP be +ve or -ve in q1? Too close to call I suspect – though I’m inclined to err on the GDP +ve side, if for no other reason than to be optimistic about things rather than the empty glass alternative.
However, the slip into negative GDP has forced the political conversation to move from cuts to growth – and suddenly delaying the fuel duty increase and bumping personal allowances are being widely pre-announced by the Treasury and our Chancellor. Somewhat ironic given we have just hiked VAT and are about to hike NI.
But what of interest rates? The Bank of England’s 0.5% level can’t go on for ever – and anyway bears little resemblance to the rates savers or borrowers are getting – a staircase of 0.25 upward increments can’t be far away, maybe summer. An increase in rates may damage exports, and with it GDP growth, but with inflation stealing money from wage packets it needs addressed. Unless of course government view inflation as acceptable to help reduce the real value of the deficit and the national debt.
A bumpy year ahead – first cope with the new VAT rate, then the NI bump, then cope with the impact of increased interest rates and then no doubt cope with the impact of another snowy winter. All against a backdrop of public sector unemployment. Suddenly the circa 2% growth that some are suggesting for 2011 sounds brilliant – so lets be thankful for that and work toward it.
One last note to dwell on – online sales for December 2010 were up a lot from the previous year (26% according to one source). And that despite the logistic warnings about delivery problems. As ecommerce developers that is some comfort to us – but we’ll be keeping a close watch on the real world GDP as opposed to the Internet Domestic Product.
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