British GDP revision surprises economists

Revisions announced Thursday to the official British GDP figures surprised economists with the revelation that business investment had fallen and net trade had performed less well than expected. The third revision to Q2 2013 figures left growth unchanged at 0.7 percent, but revisions to earlier periods meant that the Q2 expenditure mix now looks worse. While business investment declined, and net trade stalled, stock building made a greater contribution to growth than previously believed, but economists fear this could be unsustainable. Simon Wells, a British economist with HSBC Global Research, said, "On balance, today's release was not positive and while not a disaster provides something of a reality check after a period of very strong British data releases." Net trade suffered from disappointing services exports in Q1 2013, while at the same time there was robust growth in imports of goods and services. Business investment was also disappointing, falling 2.7 percent quarter on quarter in Q2. Wells said, "Given a low cost of capital for most medium- and large-sized firms, the lack of investment remains a worry. It was only a sharp turnaround in stock building that offset these downward revisions, something which is hardly a recipe for sustainable growth." Howard Archer, chief British and EU economist with IHS Global Insight, said, "It was disappointing to see business investment revised down markedly in Q2 to show a marked fall of 2.7 percent quarter on quarter and 8.5 percent year on year. There are hopeful signs in the latest surveys that companies are now starting to lift their investment intentions." The Q2 2013 growth was unrevised at 0.7 percent with a high probability that Q3 will have been stronger still, said Archer, who added he believed the economy had entered a period of sustained growth. He said, "While we expect growth to moderate following the current surge in activity, we believe the economy has fundamentally improved appreciably and it should be able to achieve consistent growth in the region of 0.5-0.6 percent quarter-on-quarter over the coming quarters. Consequently, we now forecast GDP growth at 1.5 percent in 2013 and 2.4 percent in 2014." Archer warned that while underlying activity looked a lot more solid, the economy "will be hard pushed to sustain its current sharp rate of expansion for an extended period." He added, "Tight fiscal policy, still difficult credit conditions and relatively limited global growth currently remain handicaps to British growth prospects while consumer purchasing power is currently constrained by very low earnings growth running well below inflation." Simon Hayes, chief economist at Barclays Global Economics Research, said the revised GDP figures were downbeat. He said the figures showed Q2 growth was driven by stock building and not by final demand (household consumption, government consumption and investment) as had been previously thought. Hayes said, "The Office for National Statistics was unable to identify enough hard data on demand to match the output data, and so the residual (the "alignment adjustment") is allocated to stock-building, which is now estimated to have contributed +0.2pp to quarterly growth compared with -0.2pp in the previous estimate." In addition, Hayes said the fall in the savings ratio in Q1, which some economists had identified as a consumption boom and which worried them because it could be unsustainable, was caused by shifts in the timing of bonus payments, leading to a surge in the savings ratio in Q2 to 5.9 percent from Q1's 4.4 percent.