Cazenove CIO hits out at ‘invalid’ ONS estimates for UK GDP

Richard Jeffrey 450 Index

Cazenove’s chief investment officer has questioned the validity of the Office for National Statistics’ first estimate of UK GDP after data going back 20 years shows the average revision to the first quarterly estimate of year-on-year growth has been 0.7 per cent upwards.

Indeed based on 82 first quarterly estimates going back to 1992, Richard Jeffrey says Cazenove data shows on some 34 occasions the revision has been 1 per cent or higher, which he says is enough to “severely” question the validity of the first published estimates.

On only 16 occasions out of 82 estimates was the eventual estimate revised downwards.

Jeffrey says: “If you are giving out the wrong message about what is going on in the economy, wrong investment decisions can easily be made of the back of it.”

For example prior to its first estimate for third quarter GDP growth of 1 per cent, the ONS data showed that UK output fell for three consecutive quarters, which lead to negative sentiment owing to the all the recession headlines it prompted.

“It is odd that we end to be more convinced by the seemingly hard facts that are represented by trends in economic output than by some of the softer economic numbers, such as employment,” he says.

Jeffrey points to the 600,000 jobs created in the private sector during the twelve months to June and the increase in the numbers of hours worked. The implication, when judged in the context of ONS output data, is that private sector productivity is declining rapidly in the UK.

“I simply do not believe the ONS number and from time-to-time it has made horrid mistakes, but these mistakes have an economic impact,” he says. “I prefer to trust the plot for the economy suggested by the labour market numbers.”

So how can the ONS improve its data? Jeffrey says it should take into account the purchasing managers indexes and improve the quality of its surveys. “It needs to put more effort into identifying what is going on in the fringes of the economy,” he says.

In his view the UK economic growth could end 2012 in negative territory according to initial ONS estimates, but is then likely to be revised higher. He is more optimistic for next year, saying GDP could expand by 1.5 per cent for the year.