It was a shock:  the ONS finding that yet again we have had a quarter of recession, despite a great many economists expecting a return to growth.

(Well, I was surprised.  Duncan wasn’t. Simon Ward had expected a rise.)

David Smith warns us not to care too much about these first announcements of GDP, calling the figure ‘bizarre’. He goes on to quote the Goldman Sachs view:

Goldman Sachs has put out a note on the GDP figures headed “Unbelievable. Literally”, which points out the that the early estimates of GDP in the UK have a correlation of just 0.1 with the final data.”.

That correlation is almost nothing.  The figures, Smith explains, suggest an unimaginable drop in service sector output.  Expect revisions. But even realising this, Edmund Conway sees the figures as a good reason to announce a Depression – and further QE.

In other news: investigating how much exports can help the UK, as George Osborne seems to require since he is planning to cut the deficit extremely fast (see past satirical posts).   Remember that young Mr Osborne hopes that a falling exchange rate – which he hysterically warned us about last November – will rescue the economy by providing a boost to exports.    This is from a CEPR paper:

The presence of fixed costs to export means that only high productivity firms can export, firms which precisely react to an exchange rate depreciation by increasing their export price rather than their sales. We show that this selection effect can explain the weak impact of exchange rate movements on aggregate export volumes . . Our research shows that exporting, because it requires high performance, goes hand-in-hand with absorbing exchange rate movements into prices. That exchange rates have little impact on import prices and trade volumes is therefore a natural consequence of this selection effect.

This from something the IMF did in 1994:

The United Kingdom’s export performance since the 1970s, it has often  been argued, has reflected a tendency for U.K. exporters to use favorable  exchange rate movements to improve profit margins rather than to strengthen  their competitive position and boost foreign demand for their products. . . .

And this from the University of Nottingham:

Using data on a large sample of UK manufacturing firms, we find that exchange rate movements have little effect on firm’s export participation and exit decisions. However, they do have a significant impact on export shares after entry. The responsiveness of the export share to exchange rate changes is not quantitatively small: one index point depreciation in the REER index will increase export share by about 1.28 percent. We also investigate the effects of exchange rate movements on the export behavior of multinationals, and find their export behavior is less likely to be affected by exchange rate changes than that of indigenous firms.

There might be some boost to export share amongst exporters: but the manufacturing firms in the sample exported just a quarter of their output, we need new entry into exporting if Osborne’s vision can come true.  Which is what they didn’t find.

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3 thoughts on “How seriously to take the ONS figures?

  1. To be fair…

    I was surprised. I thought inventory built would be enough to nudge it just positive. Although looking at Q3 equity earnings reports a whole series of companies (Nestle, Unilver, Electolux today) are noting continuing weakness in the UK. And large global logistics companies are still issuing profits warnings (Panalpina on Thursday) – not what I’d expect in a inventory built.

    Simple fact is though -we’re still in a deflationary environment.

    Q4 now becomes interesting.

    Side point: As for exchange rates and exports – try charting the RMB against the US/China bilateral trade numbers from about 2004. Exchange rates might not matter…

  2. That, in a way, is my view: the savings rates etc of the two currency areas determine the export-import, capital flow etc, rather than the price determining them: in the presence of a fixed price, the thing that absorbs the difference is capital flow not exchange ratio (does this make sense). So there is no definite answer to ‘what exchange rate will balance the X I books’. Not one I could find!

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