Industrial and manufacturing output fell sharply in April, by 1.6%, then rose 1.8% month-on-month in May; overall industrial output rose by just short of 1% mom in May after a 1.7% fall the previous month.
The first estimate of GDP is computed from the output side of the accounts, i.e., services, industry, construction and agriculture (minimal). Here’s our initial take on what to expect:
Industry (17.2% of GDP):
Assuming a 0.4% mom rise in output in June, industrial production will have contracted by around 1.5% in Q2. This means a negative contribution of -0.25pp to the quarterly rate of GDP during the quarter.
Services (75.8% of GDP):
So far only the April figures have been published in Q2, and they showed a 1.2% mom fall in total services output with most components declining during the month. As a result, even assuming strong growth of 1% mom in both May and June services output would be up by only 0.5% in Q2 versus Q1. One per cent mom in May and June sounds like quite a punchy forecast, although the average growth during Q2 even with this sizable rebound would be just half the average seen in Q1. If we are right then services output growth would contribute 0.4pp to GDP in Q2.
Construction (6.3% of GDP):
The construction data provided an update of output in this sector up to May. While May output growth looked weak on the surface (0.4% mom), back revisions actually suggest we could see stronger growth in Q2 as a whole than we previously anticipated. To explain, prior to the May figures we assumed that if the monthly rates of growth in May and June were the same as a year earlier construction growth would have been 3.2% quarter-on-quarter in Q2. With the new data up to May, and again assuming the same monthly rate of growth in June 2011 as was the case in June 2010, construction output would be up by 3.6% qoq. We would argue, however, that there are downside risks to this view.
Taking this all together our current view of Q2 growth at 0.4% qoq does not seem an unreasonable estimate (the contributions above add up to 0.35% qoq). The National Institute of Economic & Social Research (NIESR) reported following the release of the industrial production figures that GDP looks set to have grown by just 0.1% qoq in the second quarter.
Forecasting the past quarter’s GDP outturn can be a tricky business, and it is worth noting that since the recovery began at the end of 2009 NIESR’s error in forecasting the first estimate of quarterly GDP growth has been around 0.4pp (and still 0.3pp even if we strip out the surprise negative print in Q4).
Possible downside
Still, we would agree that the risks to our view lie to the downside largely due to the risk that neither construction nor services rebound as much as we expect in the remaining months of the quarter.
Our view is that growth will pick up in the second half of the year, reflecting the fact that we view the slowing in growth in H1 (in both the US and the UK) as temporary, related in part to higher oil prices, inclement weather at the end of last year and Japanese supply chain issues.
Nonetheless, growth should remain muted relative to past recoveries on account of high levels of debt, falling real incomes and the likelihood that the relationship between interest rates and GDP required to achieve 2% inflation is worse now than in the run up to the crisis.
Our forecasts for GDP going forward have growth gaining traction from 0.4% qoq in Q2 to 0.6% qoq by the end of this year, running at that rate in the first half of 2012 before easing off towards the end of 2012. If the aggregate PMI survey for the UK remains where it is currently (just under 54) this would be broadly consistent with those forecasts.
