Sunday, April 28, 2013

US and UK GDP growth

In the last few days we have seen advance estimates of March quarter GDP growth for both the US and the UK.  In the US the result came in bang on our forecast of 2.5% while the UK posted a result which was sufficient to avert a triple-dip recession.
While the overall US result was in line with our forecast the make-up of the result was a tad different to what we had expected: private consumption was a bit stronger while government spending was a bit weaker.  Markets were not overly impressed as the result came in under average market expectations which had crept up to around 3.0% over the last few weeks.
This result needs to be seen together with the previous quarter’s weak 0.4% growth.  At the end of last year a number of factors contributed to activity being shifted into the start of the New Year – Hurricane Sandy and the uncertainty around the fiscal cliff were the primary culprits.  That was most noticeable in the inventory cycle with inventory accumulation adding one percentage point to the March quarter result following a significant negative contribution in the December quarter.  We think this (short) inventory cycle has now run its course.
Consumer spending came in stronger than expected at 3.2%, a pace that is unlikely to be sustained.  Much of the gain came early in the quarter which again reflects delayed activity from Q4 last year to early 2013.  Growth in real disposable income has slowed recently which will be a drag on consumer spending in coming months.  Government spending fell 4.1% in the March after falling 7.0% in December.  Given the sequester we expect government spending will continue to be drag on growth.  On a more positive note, residential construction rose at a double digit pace for the third consecutive quarter. 
Looking ahead this March quarter result should be the end of the volatility, especially with respect to the inventory cycle.  Domestic demand rose 1.9% over the quarter, a level that has been relatively stable over the past two years and a good indicator of trend growth which we continue to put at around 2% per annum.  However, we expect the June quarter GDP result to be weaker than trend at around 1.5% (saar), reflecting the recent tax increases and sequestration. 
In the second half of the year the effect of fiscal drag is likely to wane and the housing market recovery will help generate a more sustainable lift in growth. At this point I’m still happy with my 2.0% (annual average) GDP forecast for calendar 2013. 
There were no problems for the Fed in this result – the core personal consumption expenditure deflator came in at an annualised 1.2%.  Roll on QE.
In the UK March growth came in at 0.3% q/q, thereby narrowly avoiding a triple-dip recession.  That result was slightly ahead of average market expectations of +0.1%.  Year-on-year growth was +0.6% in the year to March. 
We expect growth will remain hard work in the UK.  The recent Budget re-committed to the Government’s medium term fiscal consolidation plans.  To help offset the fiscal drag, the Government gave the Bank of England the ability to interpret its inflation target more flexibly and put some new tools in the monetary policy toolkit, including credit easing and liquidity policy.  Up until now the BoE has had just the Bank Rate and quantitative easing at its disposal. 
We expect these new tools to be deployed after the new BoE Governor, Mark Carney takes up his position in the middle of the year.  I still think greater use of a wider range of monetary policy tools is the second-best solution to the UK’s growth woes.  The best solution still seems to me to be a less draconian fiscal consolidation plan.