Markit: Take figures with pinch of salt

Chris Williamson, director of Markit, comments on new economic figures:

"The UK economy contracted in the final quarter of last year, with gross domestic product (GDP) falling 0.2%. The decline was the first for a year and contrasted with a 0.6% expansion in the third quarter.

"The downturn was led by manufacturing, which saw production fall 0.9%, and utilities, where output collapsed 4.1% as unseasonably mild weather led to reduced demand for energy. Service sector output was unchanged, though there was evidence pointing to weakness of the retail sector as consumers struggled with rising prices and low pay growth. Government and other services showed the strongest expansion, with output rising 0.4%.

"It is important to remember that first estimates of GDP must be taken with a large pinch of salt. In the decade starting 1998, one-in-three initial estimates have ended up being revised up or down by at least 0.5% (see chart). So we could quite feasibly see this contraction revised away in later releases, especially as business surveys suggest that the economy stagnated in the final quarter of last year, with economic growth accelerating in December. The three PMI surveys collectively signalled the strongest expansion for five months at the end of last year, and other official data released today showed the service sector expanding 0.6% in November, setting the stage for a possible rebound in GDP growth in the first quarter. Similar survey data have also shown business conditions starting to improve in important export markets such as the Eurozone and the US, as well as emerging markets such as China and India.

"While the UK clearly faces a clear risk of sliding back into another recession, which is commonly defined as two consecutive quarter of declining GDP, there are growing indications that any downturn is likely to be mild and short-lived.

"The huge uncertainty is the Eurozone, and a worsening of the region's debt crisis remains the single biggest threat to the UK economy. Recent tentative signs of improving growth could quickly fade away if the crisis deteriorates. On the other hand, an improvement in the situation in the euro area could lead to business and consumer confidence continuing to revive, spurring on a return to economic growth in early-2012."