I suppose it’s at least fair to be consistent. Given the doom and gloom attached to any preliminary GDP estimate which shows negative output growth, at least it’s symmetric to rejoice in better-than-expected figures. In America it would be annualised up – we’re growing an annualised rate of 4% per year (woohoo!)
But as I’ve blogged before, GDP is a long-run measure, and should really be seen in that context. Chuck in the Olympics and the Bank Holiday effect and we have a whole pot of unknowns. As the chart below for the past three years, and this blog from Jonathan Jones shows, there can be quite significant revisions at the best of times.
That said, the fact that the figures were better than expected even if you chop off a chunk for the Olympics, implies the UK is at least growing again. Most forecasters predicted 0.7-0.8 per cent growth, with 0.2 per cent underlying - the preliminary outturn would therefore suggest something around 0.3-0.4 per cent underlying (unless the Olympic effect has been underestimated by others).
And the Olympic effect may well not have had the large positive contribution that people are expecting. Sure, it will strongly affect the sectoral composition of growth, and the one off ticket sales as a matter of accounting have added 0.2 per cent on to the GDP figure according to the ONS. But there’s a tendency when looking at this to forget that lots of activity would have been merely displaced from some sectors to others. Lots of people were going to the Olympics, but in order to do so they were taking time off work! The ONS work comparing the economic impacts of the London and Sydney games suggests that the number of visitors to the UK was actually lower during the Olympics than in the past quarter or for this time last year. I was in Washington during most of the Olympics itself, but people in London told me that other activity within central London was ‘thin on the ground’ – particularly as suggested through traffic. So we may well find that at least some of the growth of this past quarter came ‘in spite of’ rather than ‘because of’ the Olympics.
What should make us further optimistic is that, as Lord Griffiths told a CPS event audience last year, ‘upward revisions [to GDP estimates] tend to be particularly large during and subsequent to recessions.’ In 2009 for example, the ONS vastly underestimated GDP growth as we were recovering.
So it’s not at all clear – bar the ticket sales – what sort of an effect the Olympics had. Time will tell. This, in addition to the uncertainty around potential revisions means that actually we shouldn’t put too much weight on today’s figures at all yet, but there are promising signs.
There was one interesting point today, however. Ed Balls implied during his interview with Andrew Neil that he thought lots of the current good news today was temporary and that underlying growth was weak. He intimated that his fiscal stimulus measures were necessary to build a ‘sustained recovery’.
This is interesting, because Ed Balls was presumably referring to the ‘mini-stimulus’ effect of the Olympics being a temporary effect. Yet if this is so, then why should we expect another stimulus (as he is proposing) to lead to a non-temporary effect, or sustained growth? I read an interesting paper on this from September 1999 recently in reference to Japan. It said:
“The phrase "self-sustaining recovery" trips lightly off the tongue of economic officials; but it is in fact a remarkably exotic idea. The purpose of this note is to expose this hidden exoticism - to show that anyone who believes that temporary fiscal stimulus will produce sustained recovery is implicitly endorsing a rather fancy economic model, the sort of model that finance ministries would under normal circumstances regard as implausible and disreputable.”
The author of that paper: Balls’ stimulus ally, Paul Krugman.
UPDATE: And another thing – it’s bizarre that the BBC have chosen to run the headline ‘Olympics help return UK to growth’ when the only attempt to quantify the effect of the Olympics done so far was the 0.2 per cent contribution of ticket sales. This is less than the estimated 0.3 per cent contribution of ‘Business services and finance’. Perhaps it would be more accurate, until we know much more about the overall Olympic effect, to put that on the front page of the BBC website.