UK still in recession, but actually the numbers are almost meaningless
Preliminary UK Q3 GDP numbers were pretty shocking. Headline writers will have a field day, and UK chancellor Alistair Darling has already released a statement defending his projections put forward in his budget earlier this year, saying that he’s "always been clear that growth will return at the end of the year".
Prior to the economic data release, the forecast range of economists surveyed was for UK Q3 GDP to come in between 0.0% and +0.7%. Nobody expected a negative number, so there was quite a surprise when it was announced that Q3 GDP was actually -0.4%. That’s now six quarters of negative growth, the longest run of negative numbers since records began in 1955, and in terms of the absolute decline in economic activity from peak to trough, this recession is now as bad as the early 1980s with a 6% fall. Bond and currency markets have reacted pretty aggressively – at the time of writing, gilts have reversed what was initially another hefty sell off to now be in positive territory on the day, since the market has concluded that it’s now more likely that the Bank of England will expand quantitative easing to £200bn in November. Sterling is down more than 1% against the US dollar, the euro and the yen versus where it was just before the data release.
Equity markets have shrugged the news off, though, and to me the reaction makes more sense. That’s because, as Goldman Sachs have pointed out, preliminary UK GDP numbers are fairly useless. Goldman Sachs economists have found that due to subsequent revisions, there is almost a zero correlation between preliminary UK GDP and the final UK GDP number (a +0.15 correlation). In fact, the first estimate of Eurozone GDP is a better estimate of the final UK GDP number with a +0.34 correlation! The survey data is a far better indicator of economic activity than preliminary GDP numbers in the UK, and I’d assume that the Bank of England is aware of this.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.