Whilst in Kuala Lumpur last week, I was reliably informed that the initial ONS data suggests the UK is in recession - with a 0.2% contraction in Q1 2012. This surprised me, and proved difficult to square with much of the economic survey data.
Though it is of little help to the currently beleagured Government, who find themselves languishing in the polls, the historical evidence casts severe doubt on the accuracy of the ONS preliminary calculations.
Hamish McRae's column last week spells out why. Quite simply - the ONS almost always underestimates following recessions. He uses two examples:
- the ONS's preliminary calculations in 2009 Q3 suggested a contraction of 0.4%, but subsequent revisions after two years showed growth of 0.2%
- for 2010, growth was first estimated at an annual rate of 1.4% but then subsequently revised up to 2.1%
This is all part of a wider history of first estimates of GDP being notoriously unreliable, with successive upward revisions during and following recessions. Calculations from former CPS Chairman Lord Griffiths suggest that on the 31 occasions where the initial estimate of GDP on a quarterly basis was negative between 1975 and 2008, the average upward revision after two years was 0.95 percentage points.
Furthermore, in the two years subsequent to a trough in activity, the average upward revision to growth in the past 3 recessions prior to this crisis has been 0.33 percentage points.
What does this all mean?
Well, if history is any guide, the economy is unlikely to have contracted by 0.2% in the last quarter, and seems just as likely to have been growing. If this turns out to be true, then a serious examination of ONS techniques is required to address this consistent downward error after recessions.
But there is no doubt that this recovery is still proving extremely disappointing. Whilst it's well known that recessions after financial crises tend to take longer to overcome than ordinary destocking recessions, it seems that the supposed growth of the past decade was masking an increasingly uncompetitive, overly taxed and overly regulated economy which was up to its neck in debt. This all makes the need for radical action more evident.