Where has the growth gone?

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At first look the data paints a fairly bleak picture of the state of the economy…

The preliminary estimate of GDP shows the economy contracted by 0.7% in the second quarter of 2012. The Index of Production (IoP) decreased 1.5% with manufacturing down 1.4% in Q2 compared to 2012 Q1.

The implied month on month contraction for the IoP is much starker – with total production contracting by 3.5% and manufacturing contracting by 4.4% in June.

… but it is difficult to take the figures at face value.

As noted in yesterday's blog, a contraction was anticipated but the scale of the impact from one-off events was difficult to predict. Looking at manufacturing it is very unlikely that the 4.4% monthly drop in June manufacturing output implied by the figures gives a fair reflection of the underlying health of the sector.

The output figures don't really fit with the sentiment we're picking up talking to members. While they are more downbeat than they were a year earlier, the mood is definitely not as dismal as the Q2 and June figures imply.

Compare this with the 'great' recession in 2008/09 – there was only one month where we saw a larger month on month contraction, driven by a collapse in world trade, than what we have seen this June. But the sentiment during those months was markedly worse than what we are seeing now.

So if sentiment is holding up, what could be driving this woeful June number?

The clearest culprit is the two bank holidays in June associated with the Diamond Jubilee. The additional two days of holidays in June imply a loss of roughly ten percent of the working days in June. We also know that some manufacturers went even further and shut their factories for the whole week of the Diamond Jubilee. So it is not surprising, therefore, that output took a big hit in June.

Previous Jubilees actually had a worse impact on output so June figures are not out of line with what should be expected

The ONS presents some telling statistics on the impact of the Diamond Jubilee compared to previous Jubilees and the story is not all bad. On two other occasions – the Silver Jubilee in 1977 and the Golden Jubilee in 2002 – the May bank holiday moved to June and an additional bank holiday was added. We can use these to provide a bit of a test of how bad things really are.

As shown in the chart below, each Jubilee had a severe impact on manufacturing production in June. In fact, the impact in 2012 is not as marked as the previous two Jubilees.

This picture provides a bit of relief really - the UK economy has not reacted massively out of line with historical experiences and, in fact, may have come out somewhat better than it could have. This also suggests the underlying picture is probably not as bad as the headline figures suggest.

However, we have been struggling to get the recovery back on track and we need to see other activity indicators start to show that lost ground is being made up. If this does not start to happen we will have greater cause for concern.


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