LONDON (MNI) – Having battled to persuade markets and the public to
focus on the underlying inflation outlook, rather than uncomfortably
high headline outturns, the Bank of England’s Monetary Policy Committee
now faces another tough sales job: getting people to focus on underlying
growth.

With headline first quarter and second quarter growth set to be
anaemic, or even negative, the MPC faces a challenge to prevent business
and consumer confidence being hit. MPC members have already made clear
they expect upcoming data to show artificially weak growth in both
quarters.

Analysts’ median forecast is that first quarter GDP data, out
Wednesday, will show quarterly growth of just 0.1%. A negative outturn
would trigger headlines about the UK slipping back into recession, but
MPC members are hammering home the message things are not that bad.

“I think the economy is stronger than what the data is going to
show,” Adam Posen, long the leading dove on the MPC, told reporters in
Edinburgh last Thursday.

He acknowledged how tough a job the MPC faces getting its message
across.

“I think we have been successful in getting the public to
focus on core inflation for the right reasons. We were honest about it,”
Posen said.

“Is that going to work this time (on growth), especially since we
just did that? The answer is I don’t know but … that is all we got,”
Posen added.

The initial estimate of first quarter GDP is expected to be hit
hard by dubious, and exceptionally weak, construction output figures.

The minutes of the MPC’s April meeting warned that the construction
numbers and the Jubilee holiday in the second quarter “could lead the
ONS to report further falls in GDP.”

However, “the sharp falls in construction output in December and
January were perplexing, and the Committee was minded not to place much
weight on them,” the minutes said.

Non-seasonally adjusted construction output volumes fell 12.9% on
the month in January before only partially recovering this lost ground
in February, rising 6.1% on the month and they were down 4.6% on a year
earlier.

“When we didn’t have a terrible winter, and we didn’t have falling
house prices, the way we did last year – that somehow we had a far
worse decline in construction this year than in the same months last
year, that is just odd. It is not impossible, but it’s odd,” Posen said.

The Q1 GDP data will include seasonally adjusted construction data.
With the construction data series having only a short history and the
March data not yet published, analysts highlight how tough it is to
predict what number National Statistics will plug in.

Nevertheless, even a surge in output in March, matching the 19%
rise in the previous two March readings would still leave construction
weighing heavily on GDP. Economists at JP Morgan estimated such an
outturn would lower quarterly GDP by 0.3 to 0.4 percentage points.

As construction only accounts for some 6% of GDP, that would be a
strikingly disproportionate impact – lowering Q1 GDP from, say, a
relatively robust 0.5% on the quarter to just 0.1%.

While construction has only a small weight in GDP the large
movement in output during the quarter gives it further importance this
time around.

Gauging the strength of the service sector, which accounts for
more than 70% of the economy, is of critical importance every
quarter and the best guide comes from CIPS, with the main PMI services
indicator posting the highest quarterly outturn in Q1 since Q2 2010.

Retail sales, which add into the service sector, also posted a
surprise 1.8% rise in March, meaning volumes were up 0.8% on the
quarter. Within GDP analysts appear to be penciling in growth of around
0.4-0.5% on the quarter.

The other major sector is industrial production which has fared
poorly in recent months. Manufacturing output plunged in February, but a
large rise in oil and gas and utilities output meant the wider measure
of industrial production rose 0.4%. For Q1 as a whole if we see some
bounceback in manufacturing in March then a safe forecast would be for
broadly flat industrial production on the quarter but a negative outturn
is a possibility.

The headline GDP data, however, look set to give the MPC a
headache, suggesting the economy is not recovering at a time when the
committee is signalling it could stop increasing the stimulus as it
worries about stubbornly high inflation outturns.

–London Newsroom: 0044 20 7862 7491; e-mail: drobinson@marketnews.com

[TOPICS: M$$BE$,M$BDS$]