Economists often get their timing a bit wrong, but it was particularly unfortunate for the number crunchers over at the Organisation for Economic Co-operation and Development yesterday. Less than half an hour before they issued their latest forecast on the UK economy, their prediction appeared to be flatly contradicted by Purchasing Managers’ Index (PMI) data for the services sector.
The OECD sages believe that prospects for the UK, alone among the G7 group of industrialised nations, have worsened since they last pronounced on the matter in June. The OECD, which three months ago had expected the British economy to contract by 4.3 per cent during 2009, now expects a shrinkage of 4.7 per cent. That is mainly a reflection of the UK’s GDP data for the second quarter of the year — which had not been released when the OECD last published its forecasts; this information, despite last week’s modest upgrade, was pretty disappointing. But that is all rear-view mirror stuff.
By contrast, the PMI services data — a survey that covers almost 40 per cent of the UK economy — is looking at the road ahead and it points to the sector being at its strongest in August for almost two years.
Services grew in both July and August and, along with the positive data for manufacturing in July — leaving aside the negative number for August, published earlier this week — this strongly suggests that the economy as a whole has returned to growth, albeit feeble, during the current quarter.
Other evidence in recent weeks, including some of the news from the high street and the housing market, would also appear to support that view.
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Despite all this, the OECD is predicting negative growth of 1 per cent this quarter for Britain, to be followed by zero growth in the last three months of 2009.
Needless to say, the opposition parties were keen yesterday to focus less on the PMI data than on the OECD forecasts, which cast Britain in a considerably worse light, especially when compared with some of our international competitors.
But Alistair Darling should not get too downhearted at the OECD’s latest predictions. This grandly named body’s track record is not noticeably better than anybody else’s.
More broadly, the OECD supports the view of an increasing number of economists that global recovery will arrive earlier and be stronger than was expected a few months ago.
Jim O’Neill of Goldman Sachs argued here on Monday that the evidence points to a vigorous upturn. He is forecasting global growth of 4 per cent next year and says the risk of a double-dip recovery has been overstated.
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Tim Bond of Barclays Capital struck a similarly upbeat tone yesterday, saying that recent data continued to build “a strong case in favour of the V-shaped recovery”.
But the OECD rightly warned against getting carried away. The global economy still faces real challenges and there is a danger that some countries might start tightening fiscal or monetary policy too early.
The downturn has been so sharp in most economies that the risk of resurgent inflation looks remote. At the forthcoming G20 talks, Britain’s priority must be to head off premature declarations of victory.