Surprise data set economists on collision course

After the shock came the arguments. No one expected the Office for National Statistics to say the economy shrank by 0.4 per cent in the third quarter; the survey data and early official data had been too strong.

Few were therefore minded on Friday to modify their entrenched positions about the economy, the policies needed to revive it or whether the figures contained any useful information. Stuck in the middle of these clashes, of course, was the ONS.

Its preliminary data on gross domestic product are an attempt to provide an early snapshot of economic performance. The downside is that its coverage is limited, with this first estimate based on only 40 per cent of the total hard data on output and nothing on spending or incomes.

The ONS said the weakest parts of the economy in the third quarter were likely to be restaurants, hotels and the wholesale trade. North Sea production was weak, reflecting shutdowns of fields over the summer, while the construction industry output continued to decline. But scant details in the preliminary data fuelled the arguments over its significance.

In Westminster, Labour politicians insisted growth would resume but were embarrassed by the apparent continued slide in output 18 months after the recession started. Conservative politicians hid any joy they might have felt at the government’s discomfort.

George Osborne, the shadow chancellor, said: “This is deeply disappointing news. Britain is now in the deepest and longest recession in its modern history. Britain’s economy is still shrinking a full six months after France and Germany started growing.”

Meanwhile, economists agreed that the GDP figures made it more likely that the Bank of England would extend its efforts to create money and pump it into the economy in November by expanding the £175bn programme of asset purchases known as quantitative easing.

Jonathan Loynes of Capital Economics said: “The simple fact that the economy has been weaker than [the Bank] expected would argue for extending the asset purchases further.”

The effect on taxation and public spending decisions appears to be limited because government borrowing figures look close to the Treasury’s forecasts, even if its 2009 economic growth forecasts are now wide of the mark.

Yet the most vociferous arguments took place in the City, where analysts clashed over the importance of the figures.

Danny Gabay of Fathom Financial Consulting insisted the appropriate reaction was far greater caution about predicting recovery.

“The UK has some formidable headwinds, not least of which is the over-burdened consumer which is having to cope with a broken banking system, rising unemployment, and falling income growth,” he said.

This view was described as “baloney” at Goldman Sachs, which put greater weight on more optimistic recent surveys of companies. Analysing the accuracy of the past decade’s preliminary GDP figures, Kevin Daly, Goldman Sachs economist, concluded that they contained “no statistically useful information about growth” because they were so heavily revised, often years after the event.

“Amazingly, if one wants to know in real time what is happening in the UK economy, it has been better to follow the eurozone’s early GDP estimates than the UK’s GDP estimates,” he said.

The argument will not be resolved until 2012 or later, when the ONS publishes its final GDP figures for 2009 – fully reconciled between estimates of output, income and expenditure.

Until then, complained Malcolm Barr of JP Morgan, “our ability to have a really good sense of whether we are getting a turning point is going to be really low”.