City economists get it wrong as the recession drags on

Hugo Duncan
23 Oct 2009

City economists were back in the dock today after they wildly misjudged the depth of the recession.

Official figures showed the economy shrank by 0.4% in the third quarter of the year — making it the longest recession on record.

It stunned the Ctiy where so-called experts forecast economic output to be anywhere between flat and up by 0.7% in the third quarter.

The “consensus” opinion was for growth of 0.2% and not one of the 33 economists contacted by Bloomberg predicted another quarter of contraction.

It was just the latest in a long list of City forecasts which have proved to be a long way wide of the mark.

Economists were criticised for not spotting the looming recession and now appear to be misreading the recovery.

The 0.4% decline was also well below the forecast made by the Bank of England in the August inflation report.

The Bank predicted growth of 0.1% to 0.2% for the third quarter.

Philip Shaw, chief UK ecomist at Investec, who predicted growth of 0.2%, said the biggest shock came from the services sector which declined by 0.2%.

It was at odds with recent survey evidence which suggested the sector, which includes banks and stockbrokers, hotels and restaurants, has bounced back strongly in recent months.

The construction sector remained in the doldrums, falling 1.1%, while industrial output was down 0.7% and manfacutring 0.2%.

Shaw said: “While we had thought there was an outside chance of a small decline in GDP, we were taken aback by the extent of the retracement and the fact that the third quarter showed little improvement over the second quarter.

“Certainly the continued contraction of the service sector is totally at odds with more buoyant surveys. Moreover relatively warm weather might have been expected to lift agricultural output.

“It is possible that the figures are revised upwards at some point. We can but wait and in the meantime it looks as though the UK will be the last of the major economies to recover.”

The worst offender in the Bloomberg survey was Patrick Artus, a well known French economist based in Paris at Natixis Bank, who predicted growth of 0.7%. In London, the UK economics team at Barclays Capital went for growth of 0.3%.

The shocking figures also caught the currency markets by surprise and the pound tanked against the euro and the dollar.

Mark O'Sullivan, director of dealing at foreign exchange firm Currencies Direct, said: “Today's GDP figures have caught the market off guard causing sterling to slump against both the dollar and euro.

“This week's fairytale rally for sterling has been stopped dead in its tracks. With cold hard data underlining a distinct lack of growth in the UK economy, aggressive sellers are returning to the market once more.”

These are the gurus and their defences

UBS:
forecast 0.0% — Sunil Kapadia
“We had forecast flat GDP because we had simply seen weakness in various sets of latest figures including retail sales and industrial production statistics.
“While the GDP figures are still surprising it is hard to argue against the fact that the UK economy is peerforming worse than expected.
“The figures support our view that the Bank of England now needs to expand its quantitative easing programme and that an extra £25 billion needs to be made available.”

IHS Global Insight:
forecast: 0.1% — Howard Archer
“The third-quarter GDP data are a real shocker and desperately disappointing.
“The sharp drop in industrial production in August and only flat retail sales in September had raised the downside risks. But a contraction of 0.4% quarter-on-quarter had been off the radar.
“We still suspect the economy will return to growth in the fourth quarter, helped by the car scrappage scheme and some spending being brought forward ahead of the VAT hike in January.
“Even so we suspect economic activity will be muted and prone to relapses for some considerable time to come.”

National Australia Bank:
forecast 0.2% — David Tinsley
“We were completely blindsided by the survey data.
“The service sector in the GDP figures is bad. Yet all published survey data had been positive in outlook.
“The survey data will come right at some stage but what we are seeing at the moment is the consumer still retrenching and we are seeing that with the fall in the survey in the hotels and restaurants sector.
“The retail sales figures had not been that bad but they do show that people are still tightening their belt.”

ING:
forecast: 0.3% — James Knightly
“We really cannot be sure why the forecasts are out of kilter with the GDP data until we get the detailed figures next month.
“But we have been relying on the puchasing managers data which appeared to be signalling some pretty robust economic growth.
“In the past there has been a time lag of around three months from the purchasing managers data and the economy. Perhaps this time lag is taking a little bit longer.
“Given that most of our global competitors came out of recession in the second quarter, we remain confident about the economic recovery in the UK and positive about the GDP data in the fourth quarter.”