More on Q2 GDP
The largest contributors to the high deflator in the 2012 Q2 GDP figures are imports and government consumption.
Imports fell into a sharp deflation in Q2; import spending was flat but volume of imports rose at a 5.7% annualized rate. That’s some deflation. I find it hard not to connect the dots between the the Bank’s hawkish, disinflationary stance, the strengthening of Sterling, and the impact on the trade figures. Even the most ardent Keynesian will surely agree that the Bank can neuter fiscal stimulus by allowing currency appreciation, removing export demand and increasing “import leakage”.
So even the most ardent Keynesian should be watching what the Bank is doing with Sterling. In 2011 net trade was a positive contributor to real GDP growth, offsetting falling real domestic expenditure. That position has now reversed, with real domestic expenditure growth (albeit weak growth) being offset by a collapse in the trade position. Real domestic expenditure grew at 0.5% (quarter-on-quarter, not annualized) in Q2, against a fall in real GDP by 0.5%.
This graph shows the correlation between the deflator on import spending and the Bank’s “Broad Sterling” effective exchange rate. I’ve inverted the Sterling exchange rate, so positive growth means Sterling devaluation.
Government consumption spending is an equally sorry tale, with nominal spending going up at a 4.2% rate (did somebody forget about the austerity?!), yet being fractionally lower on the chained volume measure. As in Q1, the deflator is hurting.
Those numbers are so bad it’s almost tempting to believe the demand-deniers’ unfounded belief that the numbers must be wrong. But absent revisions, the data are the best we’ve got.