Apart from making the usual point that these estimates are often subject to large revisions in the future, when no doubt everyone will have forgotten, there are a few interesting points in the data.
Construction output was assumed to have declined further in the first three months of the year, although this weakness looks odd when set against the PMI construction survey and weather patterns.
The weakness in industrial production came not in manufacturing, which was quite strong, but in the smaller and much more volatile oil and utilities sectors.
On past experience, this weakness could easily reverse in Q2, although in some sectors the monthly data pattern will be distorted by the double bank holiday in April.
While it takes around two years to get a reasonably stable estimate of quarterly GDP, labour market trends are much easier to measure and here the picture looks brighter, with a rise in full time employment over the past few months.
Growth outlook
We are not particularly optimistic on the outlook for UK growth over the next couple of years, although we think some of the pessimism is overdone.
The main downside risk to the economy comes from fragility in financial markets: any echo of the financial turmoil of 2008, perhaps as a result of Greek default, would deal a significant blow to corporate and household confidence and provoke the much discussed double-dip event.
Assuming no major financial storm, we still expect the Bank of England to raise interest rates in the second half of the year. If they don’t follow through on this, the most likely reason will be because economic momentum has faded again, putting downward pressure on inflation prospects next year.
There is nothing the MPC can do about the current high rate of inflation, except ensure that it does not become embedded in expectations, hence all the rhetoric about sticking to the 2% target.
