September 2008 GDP Estimates

RECESSION STARTED IN MAY

Our latest GDP figures show that output fell by 0.2% in the three months ending in September after a fall of 0.2% in the three months ending in August. This is the first fall of output in a calendar quarter that we have identified since we started producing our series in 1998. Unless output growth resumes in the near future it will be reasonable to say that a recession began in May of this year.

In view of these figures and of the intensifying banking crisis we take the view that the Bank of England should cut the interest rate by ½% p.a. at its next meeting. At the same time an interest rate cannot be expected to have much effect in the current circumstances and it is more important that the Bank of England works with the government on measures to prevent a sharp reduction in the availability of credit.

Our track record in producing early estimates of GDP suggests that our projection for the most recent three-month period has a standard error of 0.1-0.2% point when compared to the first estimate produced by the Office for National Statistics. This comparison can be made only for complete calendar quarters. Outside calendar quarters the figures are less reliable than this.

A paper describing the methodology used to produce the data was published in the February 2005 volume of the Economic Journal. From April until October 2006 our estimates were computed using the Index of Services published by ONS. However this monthly series shows considerable volatility which has caused us some problems in estimating GDP. From our November 2006 press release we have therefore reverted to using a model of private services output based on indicator variables. This means that, while all our figures for calendar quarters are fully coherent with ONS data, our estimates of monthly private service output are not. The series can be thought of as indicating the underlying value of the ONS series.

For more information please telephone Martin Weale on 020 7654 1945.