It seems our rollercoaster picked up pace in the first quarter with faster-than-expected growth of 0.3% GDP. In the front carriage, Chancellor George Osborne is a relieved man; Labour opposition on the other hand say they’ve been on this ride long enough and want to get off.
The growth figure is hardly confidence inspiring, though triple-dip would have represented a symbolic failure of mass proportions which would have no doubt spooked markets and economists alike.
As it stands, the mood is less ‘I feared the worse’ and more ‘I told you so’.true
Simon Ward, chief economist at Henderson Global Investors, for one is glad to put to rest “silly” triple dip predictions, silly because the 0.3% contraction in the fourth quarter of 2012 was “entirely attributable to a reversal of the Olympics boost in the third quarter so clearly did not signal underlying economic contraction”.
“As expected, the rise was driven by solid expansion in the dominant services sector (+0.6%), which offset weakness in construction (-2.5%), with little contribution from industrial production (+0.2%),” he adds.
Understated performance
Ward actually believes the latest GDP increase probably understates economic performance because, firstly, construction output is likely to have been affected by poor weather and, secondly, the recent pattern has been for initial estimates of the GDP change to be revised up.
“GDP would have risen by 0.48% if construction output had been stable last quarter, as suggested by a modest recovery in new orders in late 2012,” he notes.
For Andrew Watson, head of investment at Towry, the anxiety is still prevalent. He suggests investors and commentators lack the black and white answers they crave in terms of whether we are in recovery or not, and stocks being either explicitly good or bad.
“The concept of grey areas and a difficult and long-term recovery, with two steps forward and one step back has been anathema to both,” he says.
“However, this is the reality and it should be no surprise following a financial crisis and a balance sheet recession.”
From an investment standpoint, Watson has seen an overdue shift into longer duration and higher-quality assets this year as investors begin to accept that economic growth and interest rates will be lower for longer. The flip side to this, he says, is investors overpaying for an increasingly small number of supposed safe havens.
“Instability in markets mixes poorly with the emotional reactions of fear and greed, but equally will likely lead to opportunities for disciplined investors, regardless of the consensus interpretation of the next data point,” he adds.
A different story
Perhaps we really shouldn’t read too much in to the latest ONS figures then. After all, as Ward makes clear, latter revision of the figures often makes for a different story.
“The focus now is on how much longer the ‘double dip’ of the fourth quarter of 2011 and first quarter of 2012 survives in the official data,” he says.
“The quarterly GDP changes in the two quarters have so far been revised from an initially-reported -0.3% and -0.2% respectively to -0.1% and -0.1%… the double dip has already disappeared in onshore GDP data, i.e. excluding North Sea oil and gas production.”
For Watson, every data point is being over-analysed and extrapolated – a characteristic of the generally “manic depressive” nature of markets.
He asserts: “No one has to like trend GDP growth of 1%, or an inconsistent recovery that takes perhaps at least a decade, but they do need to accept that this remains the best explanation of the current environment, and the likely path for the future.”
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