[Note: Preliminary estimate released on 27 April 2011 reported a rise in UK GDP in the first quarter of +0.5 percent. Below, I predicted -0.7. When the detailed statistics are released in a few weeks I shall confront the source my apparent misestimate.]

Economic forecaster doing his job.

The first quarter of 2011 has come and gone, though the statistics on growth for the three month period will not appear for several weeks.  Therefore, predictions (aka forecasts) are still relevant, and I offer mine below.   Just a week ago, the National Institute of Economic and Social Research released its prediction/forecast/estimate of a 0.7 percent increase on the GDP of the last quarter of 2010. 
            If the 0.7 growth rate proves to be accurate, the UK economy would be on track for at the least a mild recovery.  It is unlikely to be true.  Growth in the short run is determined by the level of aggregate demand.  Aggregate demand has four components: private consumption expenditure, private investment expenditure, export revenue and public expenditure.   There likely performances do not offer hope for recovery.
            There is no controversy that two of the four, household consumption and pubic expenditure, were lower in the first quarter of 2011 than in the last quarter of 2010.  The estimated three percent decline in household expenditure, attributed by some to the increase in VAT (see http://www.bbc.co.uk/news/business-12107419), reflects a more serious problem, the decline of household income itself.  The fall in public expenditure is, needless to say, the result of conscious government policy.
            Measuring investment after the fact is difficult and short term predictions notoriously unreliable.  Cambridge Economics (www.camecon.com) suggests that private investment will show an annual increase of three percent in 2011.  This number seems to be picked from the air.  The major domestic incentives to increase production capacity, household demand and public expenditure, are negative.  In addition, interest rates (at an all-time low) are likely to rise, not fall.
            Hope for escaping decline is reduced to exports.  The IMF World Economic Outlook Update predicts exports growth in 2011 for the "advanced" countries at 6.2 percent (see http://www.imf.org/).  In the past UK exports have grown slower than the developed country average, with suggests that the British Chamber of Commerce prediction of 7.5 percent is too optimistic.  A probable, if also optimistic, rate would be five percent   Exports of commodities ("goods") represent about a quarter of UK GDP, implying that that export growth would impart one percentage point to GDP growth.  This would be almost exactly cancelled by the decline in public expenditures (which are double the size of export value).
            Several indirect indicators suggest that GDP fell during the first quarter.  As mentioned, household expenditure fell (see above), as well as household disposable income (www.guardian.co.uk/uk/2011/mar/29/real-incomes-fall-30-years).  Second, public borrowing exceeded expectations, implying that public revenue was below forecast.  Since most revenue is linked to household and business incomes or expenditure, the implication for GDP is obvious.  Third, consumer price inflation and average earnings were both down in the first two months of 2011, clear signs of negative growth.
            On the basis of available indicators, a bit of old-fashioned (aka sound) economic analysis, and commonsense, I judge the NIESR prediction of +0.7 percent to be much too optimistic and the BCC forecast of +0.5 not much better.  The former is especially suspect, because it exceeds the forecasts for both France and Germany.  Ten months ago I predicted that the UK economy would contract as the result of Coalition policies, and contract it did in the fourth quarter of 2010.  It will do so again in the first quarter of 2011.  By my calculations, the NIESR had the number right; they just missed the sign.  The UK economy will contract by -0.7 percent.
            Soon the statistics will be released to find out who is closer to the actual outcome.
[I am not alone in predicting decline.  The "XpertHR" website predicts -0.5.  Go to www.xperthr.co.uk/blogs/employment-intelligence/2011/03/gdp-data-march-2011.html]
             

Sources:
            Actual 2010
http://stats.oecd.org/index.aspx?queryid=350
            Predictions 2011
France: http://www.seputarforex.com/
Germany: http://www.dbresearch.com/
Italy: http://ec.europa.eu/economy_finance/articles/eu_economic_situation/
USA: http://www.bea.gov/
UK: http://www.niesr.ac.uk/pdf/060411_131746.pdf (NIESR)
http://www.investmentsense.co.uk/tag/british-chambers-of-commerce-economic-forecast-paper/

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