LONDON (MNI) – Whatever the headline-grabbing number in the initial
estimate of first quarter GDP, Bank of England Monetary Policy Committee
members will treat it with skepticism and will not set policy on it.

The importance of the first quarter GDP release has been played up
by pundits, as it follows the shock contraction in Q4 GDP. The headline
number, however, looks set to be hit hard by weak construction data and
to be impacted by weakness in energy output.

The highly volatile monthly and quarterly construction numbers are
hard to square with other evidence of activity in this sector. In
addition, North Sea oil maintenance will have badly hit Q1 output data.
These are the kind of one-off factors the MPC will seek to look
through.

Speaking to reporters Wednesday BOE MPC member Andrew Sentance
said “Energy and construction tend to be the more erratic components.”

He advocated looking at the full range of data and he believes the
economic recovery is ongoing.

“Business surveys and employment data are consistent with
continuing recovery,” Sentance said.

The Q1 GDP number, even if it is weak, looks extremely unlikely to
shake Sentance’s belief that the UK economy is recovering and high
inflation outturns mean the MPC should tighten policy.

A measure of GDP, excluding construction and energy output, might
provide a better guide to how MPC members will view underlying growth.

In any event, the first estimate of Q1 GDP is based on only some
40% of the final data and is subject to sometimes substantial revision.

“The first GDP growth estimate which signalled the economy was
coming out of recession – for the final quarter of 2009 – has already
been revised up from 0.1% to 0.5%. For this reason, I would caution
against putting too much weight on the initial estimate of GDP growth
for the first quarter of this year which we will receive tomorrow,”
Sentance said in his speech at a pro.Manchester event Tuesday.

Analysts’ median forecast for Q1 GDP is for a 0.5% rise in output
on the quarter and a 1.8% rise on the year.

While Sentance will take the view that a weak number does not
reflect the underlying strength of the economy, the majority view on the
MPC now appears to be that weakness in consumption as well as the
intensifying fiscal squeeze is weighing on activity. As a result, few
analysts now expect the MPC to tighten the stance of monetary policy in
May.

–London newsroom: 00 44 20 7862 7491; email: drobinson@marketnews.com

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