| UK GDP contracts in Q4 but recession risks over-played |
| 25.01.12 12:04 | |
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The preliminary GDP estimate for Q4 came in slightly below expectations, as output fell by 0.2% q/q, down from +0.6% in the previous quarter (consensus: -0.1% q/q, BarCap: 0.0%). The sectoral breakdown revealed services sector output was flat on the quarter, industrial production fell by 1.2% and construction sector output fell by 0.5%. Relative to our forecast the main surprise came from the fall in construction output. However, this is a highly erratic series and we would not expect this surprise to have a lasting effect on our medium-term growth outlook. While these figures reveal significant weakness in the economy, we do not think they mark the start of an inexorable slide into a severe recession. There are two important aspects to the news in Q4 GDP. First, the weakness came mainly from industrial production and construction output, which are very volatile, and we might expect to see some of this weakness unwound in Q1. Second, survey indicators suggest that the latest spell of weakness in the economy has troughed and we should expect growth to slowly improve from here. In fact the PMI surveys showed activity bottomed in October and has gradually improved since (see Chart). Furthermore, this week we saw some encouraging signs from the euro area, with flash PMIs showing activity stabilised in January in both the manufacturing and services sectors. While a technical recession cannot be ruled out, the signs are that the economy is turning the corner slowly and there is little evidence to support predictions of a deep recession. In fact, we forecast the economy to grow marginally by 0.1% q/q in Q1 and to continue to improve thereafter. Nevertheless, with the euro crisis grinding on, the near-term economic outlook remains precarious. source: BarCap |
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