Revised British GDP Data Bleak

August 22, 2008

The headline blared that real GDP had failed to expand in 2Q08 for the first quarter since 2Q92 at the end of Britain’s last recession.  Actually if expressed at an annualized rate, that is the level of real GDP in 2Q compared to 1Q raised to the fourth power, there was marginal positive growth last quarter of +0.2%.  But that was small consolation in what was an otherwise bleak report.  Unplanned and unwanted inventory building, which will be reversed in coming quarters, accounted for 2.3 percentage points (ppts) of positive growth.  Net exports contributed a further 2.5 ppts, because imports dived 5.6% at a seasonally adjusted annual rate, surpassing a hefty decline of 1.8% saar in exports.  Personal consumption and business investment (including the hapless construction industry) posted drops of 0.3% saar and 19.6% saar.  On-year growth amounted to -1.1% in the production sector, 0.5% in construction, and 2.0% in services.  The weakness of net exports helped reduce the on-year increase in the GDP price deflator to 2.6% from 3.0% in year to 1Q08.  Real domestic demand has now declined in two consecutive quarters.  Bank of England officials have not cut their 5.0% Bank Rate in almost five months because CPI inflation has accelerated from 2.1% at end-2007 to 4.4% in July and is expected to crest at or above 5.0%.  The rapid slowdown in economic activity will eventually lead to more cuts, but a majority of policymakers  so far has wanted to delay the next move until more evidence arises that the worst news on inflation and expected inflation lies behind them.

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