2012.05.28 13:40:02 MONUMENT SECURITIES: 'Austerity? What austerity?'

By Stephen Lewis Of Monument Securities LONDON (Dow Jones)--Critics of the U.K. government's fiscal policy greeted the Office of National Statistics (ONS)'s release last week of revised first-quarter 2012 figures for U.K. GDP with howls of protest. The nation's output was reckoned to have shrunk by 0.3% on the quarter. That was an even worse performance than the 0.2% decline estimated in the advance report. When the advance figures came out, they were widely reckoned to be too bad to be true. As the minutes of the Monetary Policy Council's 9-10 May meeting put it, "business surveys, labor market developments and reports from the Bank's Agents had all pointed to somewhat stronger activity in the first quarter." For many observers, though, the revised ONS figures represented conclusive evidence that the economy had, indeed, suffered another quarter of contraction. It seemed the government's austerity drive had plunged the U.K. back into recession. We should not take the first-quarter 2012 GDP data as gospel, however. At this stage last year, the four-quarter growth in real GDP to first-quarter 2011 was published as 1.9%, whereas now it is estimated to have been 1.6%. And that will not be the end of the revisions. There was nothing final about the numbers the ONS published last week. There is every indication that the statisticians are producing the figures under pressure. Since they presented the report on 24 May, they have rushed out a correction, alerting readers to the fact that where the text had referred to an increase in inventories during the quarter, it should have referred to a decrease. This suggests at the very least that the proof-reading was hasty. Then again, several tables that normally appear at the time of the ONS's second estimate, namely, Tables E to H covering the detailed breakdown of the expenditure components of demand and crucially the "changes in inventories," were missing from last week's release. The "changes in inventories" component is important because the statisticians assign unidentifiable error to this heading, pending further information. The published swing in inventories was so large and irregular, from +£1,082 million in fourth-quarter 2011 to -£1,167 million in first-quarter 2012 (equivalent to 0.6% of GDP), that it is understandable that the error in the text should have crept through. But it also suggests the statisticians were not as advanced in their data-collecting as they usually are at that stage in the process. This may be further evidence of strain in the ONS's use of resources. Perhaps the expansion of health and social statistics that the ONS collates has been to the detriment of its provision of reliable economic data. If so, it might turn out to be a short-sighted priority. From 1 April 2008, the ONS has operated as a non-ministerial department accountable to Parliament instead of to the government. The initial aim in making this change was to help improve public trust in official statistics. This reform seems to have fallen short of its objective, however, when not even the monetary authorities feel confident enough in the official data to base their policy decisions on them. Whatever the quality of the data, they hardly bear out the case that government austerity is strangling the U.K. economy. At least, the cuts as popularly conceived, in public sector employment and the provision of public services, have not exerted an overall negative influence on economic growth. Since second-quarter 2010, when the coalition entered office, the final consumption expenditure of the general government sector is estimated to have risen, in volume terms, by 1.6%. Indeed, this was the only element of domestic demand to register expansion over that period. Had it not been for this growth in government outlays, GDP would have been lower in first-quarter 2012 than it had been in second-quarter 2010. So much for the government's cuts having blighted the economy. All the present government has achieved so far, with respect to its own current spending, is to scale back the plans for expansion that the previous government had envisaged. Admittedly, there are other data series showing substantial cuts in central government, and especially in local authorities, employment. These figures might be squared with the national accounts data if the government sector were achieving large gains in efficiency. Far from being a reason for concern about the government's austerity policy, such gains in efficiency, if they were really happening, would surely be a matter for congratulations. (The suspicion must be, though, that outsourcing is responsible for a significant part of the fall in the number of workers counted as employed in the public sector.) The general government sector's capital spending may well be another matter. We cannot say for sure, because the ONS has not yet got round to producing the first-quarter 2012 numbers, but there would have had to be a remarkable surge in this component of spending from the fourth-quarter 2011 level for general government capital expenditure not to have contributed to downward pressure on GDP since the coalition took office. This component of demand was 8.8% below its second-quarter 2010 level in the final quarter of last year. All the same, in the context of overall GDP, this cut in capital spending had a minor impact, subtracting only 0.2 of a percentage point from GDP growth over the period. The employment impact of a reduction in government capital spending is likely to have been felt chiefly in the private sector, by government contractors and their workforces. Indeed, the U.K. private sector has been faring worse than the GDP data suggest since second-quarter 2010, and for several quarters prior to that also. That is why the sense of recession never really lifted from the U.K. economy, even when the GDP figures were looking stronger in the middle of last year. But we have to look further than the government's fiscal policy to find the principal factor explaining the malaise. Most likely, the broken mechanisms of private credit are chiefly to blame. According to Mr Clegg, the Coalition is now aiming to use the government's balance sheet to mobilize credit for private borrowers, whatever that may amount to in practice. -By Stephen Lewis: (+44) 20 7190 7193; sjlewis@monumentsecurities.com (Stephen Lewis is chief economist at Monument Securities Ltd., London, independent brokers specializing in institutional business.) Opinions expressed are those of the author, and not of Dow Jones Newswires. This column is published for information only, and it neither constitutes, nor is to be construed as, an offer to buy or sell investments. The information and opinions expressed herein are based on sources the author believes to be reliable, but he cannot represent that they are accurate or complete. Any information herein is given in good faith, but is subject to change without notice. No liability is accepted whatsoever by Monument Securities Ltd., employees and associated companies for any direct or consequential loss arising from this article. (END) Dow Jones Newswires May 28, 2012 07:40 ET (11:40 GMT)