Horrible GDP Numbers In UK Leave Economists Incredulous

The latest figures on U.K. GDP, released this week, were so demoralizingly bad that some economists and market-watchers are simply refusing to believe them, suggesting they are the result of a statistical anomaly and will see large upward revisions.

The British Office of National Statistics (ONS) on Wednesday said the U.K. economy shrank by 0.7 percent from April to June, deepening the current recession and estimating GDP 4.5 percent lower than it was before the beginning of the global financial crisis.

The figure was so demoralizingly bad, some economist and market-watchers are simply refusing to believe it, suggesting it is the result of a statistical anomaly, does not jive with other leading economic indicators and is likely to be increased soon.

How bad exactly was the GDP figure? To put it into perspective, a survey of 80 economists by Bloomberg News expects the U.S. on Friday to report second-quarter annualized GDP growth of 1.4 percent. The U.K. figure is not annualized, but if it were, it would amount to a negative 2.5 percent. The figure released Wednesday by Britain's ONS undershot analyst expectations by half a percentage point -- consensus views were for a drop of 0.2 percent -- a level of negative surprise not seen since 2010.

So just how awful was the data on Britain's economy?

Peter Dixon, an economist at Frankfurt's Commerzbank told The Telegraph that "there's nothing good that comes out of these numbers at all" and that the drop showed a "far worse period of activity than we'd expected." Howard Archer at IHS Global Insight described it as a "very nasty surprise."

The surprising drop -- attributed to a combination of recessionary austerity cuts, bad weather, contagion from the euro zone crisis and loss of productivity from a four-day holiday weekend in early June -- was such that it was now "inconceivable that there'll be positive growth this year," Gerard Lyons, a chief economist at London's Standard Chartered, also told The Telegraph.

But perhaps because the expectations miss was so wide, and because official government forecasts are still on the highly optimistic side -- the government's independent fiscal watchdog is still forecasting GDP growth of 0.8 percent for 2012 -- economists have recovered from the initial shock on Wednesday to now suggest the gloominess is overblown.

Vicky Redwood, chief U.K. economist at London-based Capital Economics, wrote in a note to clients that "there is a possibility that the GDP figures are underestimating the true strength of the economy. At this stage, the ONS has very limited information of what actually happened in June. And of course other economic indicators, such as employment, have recently painted a stronger picture."

Similarly, economists at Goldman Sachs wrote that "the (U.K.'s GDP) data is difficult to reconcile with any other indicator of economic or labour market activity and is likely to be revised higher over time," noting an upwards revision was likely, as U.K. GDP figures have been revised by over 0.7 percentage points some 18 percent of the time in the last 10 years.

"Our UK Current Activity Indicator (CAI) -- which is designed to distil information from a wide range of activity indicators and is distorted to a lesser extent by the additional holiday than the official data -- has been consistent with GDP growth of around 1.0%-1.5% annualized. In our view, the UK economy is sluggish, but it is not in recession," Goldman analysts added.

Also jumping into the fray, The Economist had a blog post Thursday explaining why the horrid GDP figures were incongruous in the face of a country seeing job growth, as 181,000 more people in the U.K. were employed from March to May than they had been over the winter.

Since GDP measures economic activity, the newspaper asked, "the enigma remains. Why, to put it crudely, are we consistently having more jobs and less stuff being produced?"

That enigma will likely be solved, one way or the other, as either employment or GDP numbers get revised later in the year. At the moment, though, the bad print is already having widespread effect.

Reuters released a poll Thursday showing economists and bond strategists believed there is a one-in-three chance the U.K. would see a downgrade from its sterling AAA rating in the near future. Both Fitch Ratings and Moody's Investor Services have the country on watch for a downgrade.