Major GDP revisions extending back to the start of 2012 imply that the economy will have expanded by 1.9% in 2013, 0.5 percentage points above the Office for Budget Responsibility’s forecast two weeks ago but in line with the prediction here last December of an increase of about 2%.
GDP is now estimated to have grown by 2.3% between the final quarter of 2011 and the third quarter of 2012, up from 1.7% a month ago. The shortfall from the peak reached in the first quarter of 2008 has narrowed to 2.0%, or 1.0% excluding oil and gas production – the non-oil economy should regain peak output in early 2014.
Based on the new figures, the first estimate of calendar 2013 GDP growth to be released on 28 January will be 1.9% unless fourth-quarter expansion falls below 0.7%.
Faster growth in output since late 2011 has carried over into the current-price GDP numbers, i.e. inflation, as measured by the GDP deflator, is little changed from previous estimates. Current-price GDP grew by a solid 4.5% in the year to the third quarter of 2013, with the deflator up by 2.6%
Robust expansion of current-price GDP in recent years, despite sluggish broad money growth, supports the view here that negative real interest rates are driving a trend rise in the velocity of circulation. Velocity* has increased by 1.3% per annum from a trough reached in the second quarter of 2009 – see chart. If this continues, broad money can grow by no more than about 3.5% per annum to be consistent with the 2% inflation target, assuming potential output expansion of about 2.5%. Current monetary growth – an annual 4.4% in October – is, therefore, too high.
*Velocity is defined here as current-price GDP divided by the break-adjusted level of the money stock six quarters previously – a lag is applied to capture the delayed impact of monetary changes on output and prices.
