Don't worry, it is just a blip

The UK economy keeps throwing out nasty surprises. Despite the coalition's fiscal consolidation programme, the fiscal deficit shows no inclination to narrow. The December inflation number was grim, comprehensively undermining the Bank of England's monetary policy strategy. Yesterday, the GDP data supplied the bad news, suggesting that the economy shrank during the last three months of 2010.

So how bad was q4 number? Was it blip or an early warning that UK GDP is about to double-dip?

The balance of evidence suggests a blip. The snow storms of December was costly in terms of GDP. Roughly speaking, there are 91 days a quarter. Extracting weekends, there are 65 working days. If the economy stopped working for three days, that would cost, in approximate terms, about 0.5 percent of GDP. So, the q4 number is fairly consistent with the claim that it was "the weather wot did it".

A breakdown of the components of GDP also support the view that the bad weather in December severely affected economic activity. Construction, hotels and restaurant sector and transportation all recorded declining activity. These sectors should quickly recover during the first quarter of this year.

Besides, prior to the last quarter, the economy had clocked up a year of of solid growth numbers. The number of hours worked had risen, while unemployment had stabilised. Prior to q4, consumption expenditure had also strengthened.

Moreover, public accounts data hasn't yet offered any signs that the fiscal retrenchment plans have yet impacted the economy. This suggests that fiscal policy, at least up to the end of this year, has broadly supported aggregate demand.

The four earlier quarters of growth must have also improved investment confidence. This tends to lag the pick up in GDP. It is therefore likely that investment expenditure in the coming months will pick up, further strengthening growth prospects.

For what it is worth, and it is not much, my sense is that the first quarter GDP number will be significantly stronger. Consumption will make up for deferred expenditure in December. The VAT hike might affect retail activity in January, but this will only be temporary. By February, we will have absorbed the shock and spending patterns will return to normal.

Nevertheless, I will admit that this scenario contains a large degree of wishful thinking. The idea that the UK economy could again start to shrink, so soon after the previous recession, is too appalling to contemplate. So, until the next GDP number is printed, let's maintain a cheerful demeanor; the double dip isn't going to happen.