|Focus on commodity prices, not on the sideshow of GDP figures
|Thursday will see publication of an economic indicator of unusual significance, at least for political comment and popular discussion – the GDP figures for the first quarter of this year.
They will attract a good deal of attention because of the possibility of a so-called triple-dip recession. According to the widely accepted definition, an economy is in recession if it contracts for at least two consecutive quarters. The UK has already experienced this twice since 2008. Hence the so-called double-dip recession. And GDP fell again in Q4 last year.
So a fall in Q1 of this year would give a triple-dip – for the first time in our recent economic history.
What a strange world we live in. In reality, there is no significant difference between an economy contracting by 0.1pc and expanding by 0.1pc. But one gives the opportunity for an apparently significant soundbite and the other does not. In fact, the figures are so unreliable that whatever is reported, the true direction of change in the economy could easily be the opposite. The fairest characterisation of the economy at the moment is that it is pretty much static.
Admittedly, there are a few encouraging signs of growth. The survey from the British Chambers of Commerce suggests that the economy is steadily recovering. But other business surveys do not confirm this picture.
The weakness of the official GDP figures has owed something to a drop in North Sea oil output and weak construction. Without these, the economy would be registering some modest economic growth. Moreover, it would never have undergone a double-, never mind a triple-, dip. Mind you, it would still be pretty weak and output would still be below its previous peak.
And GDP continues to be influenced by various distortions. Over this last quarter, the unusually bad weather depressed construction activity and retail sales. This follows last year’s distortions caused by the Queen’s Jubilee celebrations and the Olympics. Indeed, without the fall-back from the artificial boost given to Q3 by the Olympics, it is unlikely that GDP would have fallen in Q4.
Of course, there is a widely held view that the GDP figures are in any case giving a grossly pessimistic picture of the true state of the economy. During the Lawson boom of the late 1980s, one reason why the Treasury allowed matters to get so out of hand is that the official statistics seriously understated how strongly demand was growing. So it can happen.
But I find it difficult to believe that there is a similarly large understatement now. For there is little corroborating evidence, apart from the high employment figures. Moreover, if demand in the economy is really pretty strong, why is pay growth so weak?
The pay numbers published last week really were quite extraordinary. Over the year to February, there was no increase in average earnings at all. That’s right, zero, in nominal terms. Aside from a brief period in 2009, this was the weakest figure since the late 1960s.
The result is that real pay, i.e. after adjusting for inflation, is falling fast. And it will go on falling for many months yet. This is going to make it particularly difficult for consumer spending to increase this year.
Meanwhile, the external environment looks softer. Last week, the markets were much exercised by the fall in Chinese growth to 7.7pc for the year to Q1. It has dawned on them that Chinese growth at about this level is now the norm.
In the US, the last few economic reports have suggested that the pace of expansion may be slowing there. Matters in the eurozone continue to look grim with no signs of an economic pick-up. And there could be a new eruption of the Cyprus crisis if MPs there fail to endorse the recently agreed rescue package.
Still, one significant favourable development over recent weeks has been the softness of commodity prices. A good deal of market comment has centred on gold, whose price has plunged, but this is of little direct economic relevance. More importantly, just about all categories of commodity have fallen in price, from industrial metals to grains. Oil prices are down by 16pc f rom their peak. This matters a great deal.
I have long argued that the coincidence of high commodity prices with the aftermath of the financial crisis and the disaster in the eurozone is a key reason for this economic downturn being so serious and protracted. If commodity, and particularly oil, prices were to continue to fall, that would give a fillip. Production costs would come down and consumer real incomes would start to rise. Even in the UK, this could be enough to spark a recovery. Could. For the avoidance of doubt, I remain cautiously pessimistic.
Enjoy Thursday’s GDP figures, if you like. But they are really a sideshow. You should rather focus attention on commodity prices and developments in the eurozone. Cyprus could yet provide a shock that shakes the world.