The reported 0.3% decline in fourth-quarter GDP rests on an official guess that construction output slumped in December. Even if the number stands, however, it suggests underlying growth in the economy last quarter, allowing for drags from the unwind of the Olympics ticket sales boost and lower North Sea output. The best “clean” comparison is between the levels of non-oil GDP in the first and fourth quarters – there was a rise of 0.5%, indicating a continuing, if weak, recovery.

A post on 11 January stated that the production data then in hand – for October and November for industry and construction and October only for services – were consistent with a 0.1% rise in fourth-quarter GDP. So what went wrong? The assumption in the post that industrial and services output would remain stable for the balance of the quarter proved correct, taking the two sectors together. The forecast miss, instead, reflected an estimated 16.0% plunge in construction output in December – this wiped out strength in October / November to leave the quarterly total only 0.3% above a very weak third quarter.

It is important to realise that the December construction output figure is little more than a guess based on early responses to the monthly business survey and a judgemental fudge factor. It is certain to be revised significantly, though not necessarily upwards. A strong case can be made that the Office for National Statistics should eschew this sort of guess-work and either extrapolate data for the first two months to derive a quarterly estimate or, preferably, delay publication of the highly-sensitive preliminary GDP report until the second month of the subsequent quarter when more reliable information is available.

Even assuming that today’s weak number is confirmed, however, it does not imply that the onshore economy contracted in late 2012, because the quarterly GDP change was depressed by at least 0.2 percentage points by an unwind of the Olympics boost and a further 0.2 from a decline in North Sea oil and gas extraction. Adjusted for the Olympics, in other words, non-oil GDP rose by about 0.1%.

The strong third-quarter GDP rise reflected a bounce-back from a second quarter depressed by an additional bank holiday as well as the Olympics boost. The last quarter unaffected by such distortions was the first quarter of 2012. Non-oil GDP rose by 0.5% between the first and fourth quarters – weak but a much better performance than in the Eurozone, where GDP is likely to have contracted by at least 0.5% over the same period.

Will today’s number prompt further MPC easing at its February meeting? A key consideration is that output sluggishness coupled with an apparent solid rise in aggregate hours worked last quarter (based on data through November) suggest ongoing weak productivity performance, offsetting an "output gap" argument for more stimulus. The “MPC-ometer” model followed here rates the probability of further action in February at less than 50% even incorporating today’s news; the final reading will depend importantly on January purchasing managers’ surveys released at the start of the month.

Previous posts discussed French post-election narrow money weakness and a deterioration in the country’s TARGET2 balance, suggesting an outflow of capital. French real M1 deposits contracted in the six months to November, contrasting with a surge in Germany and moderate growth in the rest of the Eurozone – see first chart. This warned that the French economy would underperform not only Germany but also a stabilising periphery.

Today’s “flash” purchasing managers’ surveys provide further support for this theme. The second chart, extracted from the press release of data provider Markit Economics, shows composite output indices for Germany, France and the rest of the Eurozone. The suggestion is that GDP is still falling in France even as it recovers in Germany and stabilises in the rest of the region. (The output index reading for the latter remains below 50 but is above a level historically associated with GDP contraction. No further country breakdown is available at this stage.)

December monetary statistics released on Monday will be important for assessing whether France is simply lagging a regional recovery or is on a divergent path of weakness, implying mounting pressure on President Hollande and likely further financial strains.

The view here that the UK economy is strengthening in lagged response to faster real money expansion receives support from labour market statistics released today, showing a surprisingly large drop in claimant-count unemployment along with a further rise in vacancies. A GDP trend indicator based on claimant-count changes continues to climb solidly – see first chart. (The indicator rises if the monthly change in unemployment is below a fixed level.)

Further indirect evidence of economic improvement is a January rebound in the equity analysts’ revisions ratio – the net proportion of company earnings estimates raised over the last month. This ratio correlates with business survey activity indicators, including purchasing managers’ new orders indices, which could strengthen significantly this month – second chart. (The indicator shown is a weighted average of the manufacturing new orders and services new business indices.) 

The Bank of Japan, under departing Governor Shirakawa, has resisted government pressure for substantial further monetary easing. While introducing a “price stability target” of 2% inflation to replace the previous “goal” of 2% or lower “in the medium to long term”, the BoJ will stick with previous plans to add ¥36 trillion to its securities portfolio in 2013. Purchases will continue in 2014 but will fall to a net ¥10 trillion.

This decision is sensible since money supply measures are growing solidly – see previous post – and current purchases are already huge: ¥36 trillion equals 7.6% of projected 2013 GDP. If a monetary slowdown warrants further stimulus, this would be best achieved by lengthening the maturity of securities purchases rather than expanding the size of the programme.

Fans of yen debasement must now pin their hopes on Prime Minister Abe finding his Arthur Burns.

Thursday’s post discussed a recent divergence between two key forecasting indicators monitored here – global six-month real narrow money expansion and a long-range leading indicator derived from the OECD’s country leading indices. Real money growth was estimated to have risen to a 12-month high in December, suggesting global economic acceleration through the first half of 2013. The long-range leading indicator, by contrast, fell slightly in October and November, hinting at an approaching peak in growth momentum.

Unexpectedly, this disagreement appears to have been resolved by annual revisions to US monetary statistics released late last week. US money measures accelerated strongly in late 2012 but the pick-up was less dramatic than previously estimated. This has affected the profile of global six-month real money expansion, which now falls back in November and is likely to have remained below its October level in December, unless European numbers to be released next week show unexpected strength – see chart.

Real money has led industrial output by an average of six months at recent cyclical turning points, with a maximum of 11 months. For the long-range indicator, the average lead has been five months and the maximum nine. The bias here is to place greater weight on real money. Assuming that the October growth peak is confirmed, and using the average six-month lead, the suggestion is that global industrial output expansion will rise to a peak in April. This would be consistent with the historical lead variation of the long-range indicator, which peaked in September.

Thursday’s post argued that a fall in real money growth would warrant greater caution towards equities and other risk assets. There are, however, some crumbs of comfort for bulls:

• The economic forecast implies much better coincident numbers in early 2013, which may support markets near term (although buoyant investor sentiment suggests that much is discounted).

• Neither real money growth nor the long-range leading indicator has turned down significantly – economic growth could conceivably plateau rather than peak this spring.

• Monetary policy looks set to remain supportive: market weakness associated with growth peaks in 2011 and 2012 occurred after the Fed had suspended QE but its current programme should continue through the first half of 2013 (at least), with the Bank of Japan also injecting liquidity.

This suggests reducing some risk exposure but awaiting additional evidence of less expansionary monetary conditions before shifting to a defensive strategy.