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Merryn's Blog

The gloomy GDP data is good news for the Bank of England

With the economy shrinking by 0.5% from October to December last year, the latest GDP figures are disappointing. But they are likely to be good news for the Bank of England, says Merryn Somerset Webb.

One thing economists just can't do is forecast what's going to happen to the economy. Anyone in need of any further convincing on this need only look at the shock being expressed around the City at the GDP numbers released this morning.

The consensus among economists was that they would come in at 0.2%-0.6%. They actually show the UK economy shrinking by 0.5% from October to December last year. Whoops.

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"This is a horrendous figure. An absolute disaster," says Daiwa Capital's Hetal Mehta. Chancellor George Osborne was a bit calmer: he just called it a "disappointment." Which it is.

But it isn't quite as awful as poor Mehta thinks. Knock out the weather, says the ONS, and growth would be "flattish," which under the circumstances isn't so bad. Note too that inside, there are some encouraging bits and bobs. Manufacturing output rose by 1.4% and put in its strongest performance in December since 1994. That's not to be sniffed at.

It is also worth noting that the GDP figure is very likely to be revised up: first estimates of quarterly GDP growth are almost always wrong. Even the ONS points out that they have guessed at 0.5% based on very limited data from December.

It is also at odds with other recent data, which rather suggests there is a little growth out there. So for all the shock horror around today, it may well be that this number has no information value at all.

There is also a small group of people who will probably think the negative figure is exceptionally good news: the members of the MPC committee.

Why? Because it gives them a really good reason not to raise interest rates. It doesn't matter how much savers nag them about their negative real interest rates, with negative GDP to lean on, they can just keep saying that deflation is the real risk and leave it at that (despite the fact that sterling is now likely to weaken and push up import prices further).

Anyone who was expecting an interest rate rise in April can now relax.

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