So much for ending the year with a bang! Data released from the U.K. earlier this week showed that the economy contracted by 0.2% in the fourth quarter of 2011.
Not surprisingly, the negative figure has gotten a few market junkies as scared as Cyclopip is when it’s bath time. For one, it means that the country is one step closer to a recession. On top of that, talks of more QE from the BOE are also hitting the headlines. Yikes!
That’s right! A handful of economic gurus think that the central bank may just increase its asset purchases. Some even say that it could happen as early as February! You see, in a speech earlier this week, BOE Governor Mervyn King already expressed his openness to the idea of providing the economy with more stimulus. And so, naysayers think that the negative GDP report may just be enough reason for the bank to launch another round of QE to help stimulate economic growth.
But before you start chewing off your finger nails in worry, you should know that the GDP report isn’t all that bad. Here are three reasons why:
1. It wasn’t unexpected
Almost everyone saw a negative figure for Q4 2011 coming because economic activity was down during the early part of the quarter. For instance, the manufacturing PMI showed that the sector contracted in October, coming in below the 50.0 baseline at 47.4 and was down from its 50.8 reading for September.
Because of this, along with other signs of slowdown, the consensus for the 4th quarter GDP report was for a 0.1% decline. Sure, the actual figure overshot the forecast, but the measly 0.1% difference doesn’t make the report much of a shock.
Even Chancellor of the Exchequer George Osborne wasn’t surprised with the figure. He admitted that he was disappointed with the economic performance, but said that it was not unexpected.
2. Economic conditions actually picked up
Secondly, a closer look at the data will show that economic performance wasn’t as bad as the headlines made them out to be.
As you probably read, the biggest headache for the U.K. was that production industries became a real monkey on the back of the British economy. Production industries output dropped by 1.2% during the 4th quarter, which was enough to put quarterly GDP in red territory.
The good news though is, if you dug a little deeper, you would have noticed that the services sector did much better than other industries. Take note that the services sector accounts for 70% of the U.K.’s GDP, making it a major driving force of the economy.
A look at the services PMIs will show that the index stayed above 50.0 for the majority of the year, indicating expansion in that sector. Looking at the data, the services industry was the only sector that wasn’t in the red during the 4th quarter.
Also looking at the overall picture, we see that the U.K. economy actually grew by 0.9% in 2011. Not too shabby eh?
3. The negative report had more to do with the euro zone
Thirdly, one could also argue that the U.K.’s woes had less to do with the domestic economy and a lot more to do with the euro zone.
With Germany and the rest of the euro zone bloc slowing down their orders, it was inevitable that the U.K. would take a hit as well. Keep in mind that Germany is one of the U.K.’s biggest trade partners, so it was only natural for production to fall as German demand dropped.
However, recent euro zone PMIs, show that activity in both the manufacturing and services sectors seem to be stabilizing, as many of this past week’s surveys came in better than expected. The U.K. economy could benefit from the pick-up in economic activity if growth in the region is sustained.
See! A deeper look at the GDP report shows that the British economy didn’t do that bad in the last three months of last year.
Now, we’ll just have to wait for the next GDP figures to see whether or not the U.K. has entered a technical recession (two straight quarters of back-to-back negative growth). Chances are that we’ll see another small contraction during the 1st quarter of this year, but even if we do, it will be much better than what we saw during the Great Recession of 2008. Heck, I doubt anyone will actually feel it!