Back in March I asked where growth was going to come from in 2011. And today’s GDP release gives us some idea. The main source of growth in 2011q1 was net trade, on the back of strong export growth. This is good news for a better-balanced economy.
What is perhaps a little perplexing, is that the other positive contribution to growth this quarter was government spending. But, as the bloggers over at FT Alphaville have pointed out, “that’s partly a quirk of the way departments spend more at the turn of fiscal years, much as the VAT rise was especially nasty for household spending this time”.
But this means that investment and consumption both dragged on growth. Consumption is probably not something anyone will be surprised by, with the continued squeeze on households, but investment is another story. The fact that investment fell in 2011q1 does not look like good news for rebalancing.
While I don’t wish to argue that a fall in investment was a good thing, perhaps a little perspective is needed. Manufacturing investment growth has lagged behind output growth in every recession since the eighties (manufacturing went into recession in the 2000s). In fact, despite the dip in manufacturing investment this quarter, it has rebounded more strongly than at the equivalent point following the previous recessions.
Figure one: manufacturing investment (Index: last quarter of recession = 100)
Source: ONS, Oxford Economics and EEF
It is not just investment that is stronger, but according to EEF’s Business Trends survey, manufacturers' intentions to invest were stronger in q1 than at the equivalent point in the 2000s recovery. In both cases, actual investment has lagged behind intentions, so we can't write off an investment-driven recovery just yet.
EEF’s q2 Business Trends will be out on Monday 6th June.