Experts question gloomy ONS reading of British economy

Britain's economy officially slid back into recession in the first quarter of the year as the economy shrank by around £220m, triggering the first "double-dip" since the 1970s.

Or did it?

A chorus of voices has emerged to question the accuracy of the reading, suggesting the possibility for a sharp revision by the Office for National Statistics (ONS) and an exceedingly complicated set of decisions facing the Bank of England.

"This disappointing news comes as something of a surprise," said John Cridland, the director general of the Confederation of British Industry. "Since the turn of the year, business confidence has improved and, while still challenging, underlying economic conditions also appear to have strengthened."

One of the principal components to the 0.2 percent contraction was a huge 3 percent plunge in construction activity. Along a 0.4 percent dip in Industrial production, the figures more than offset an overall (albeit mild) increase of 0.1 percent for the nation's manufacturing sector.

But it's the construction figure that's most puzzling. Bank of England economist Adam Posen said only last week that he found the reported construction weakness "odd" and hinted that the underlying fundamentals in the economy were firmer than the data show.

Markit, the financial data firm which helps produce the Chartered Institute of Purchase & Supply economic surveys, or PMIs, said the ONS reading could be sharply revised based on the data that's been reported to date.

Markit economist Chris Williamson says the collective strength of three months of service and manufacturing sector activity point to an actual growth rate of 0.5 percent. He also said the 8 percent retail sales growth - and a slowly improving employment picture - offer further support to a big revision from the statisticians.

"There's a real sense of déjà vu here," Williamson said in research note published Wednesday. "A similar situation occurred in late-2009, when the PMI surveys indicated that the recession ended in the third quarter. The good news was soon shattered by the initial release GDP data for that period, which indicated a 0.4% contraction and ongoing recession." That figure was ultimately revised upwards by the ONS to show the economy actually *grew* by 0.2 percent in that quarter.

Others agree.

The chief economic advisor to Ernst & Young's ITEM Club, Andrew Goodwin, said he would be "very surprised if these figures were not revised upwards substantially". Goodwin, who at the ITEM Club uses the UK Treasury's economic models to make its own forecasts, added that the difference between the monthly survey data and the official ONS reading was "virtually unprecedented".

Investors largely shrugged off the figures, taking the FTSE 250, the broadest measure of share price performance for UK-based companies, higher by around 72 points, or .64 percent, by mid-day London time. Gilt yields also rose, with the benchmark 10-year bond trading at 2.13 percent, suggesting traders are not betting on an increase in the Bank of England's programme of quantitative easing.

This isn't to say the current situation isn't troubling. The British economy is still 4.3 percent smaller than it was in the first few months of 2008, wages are growing at a paltry 1.1 percent while cost of living increases remains stubbornly high at 3.5 percent. Its biggest export customer is mired in a debt-fuelled contraction that could last well into 2013 and its currency sits at a 20-month high against the euro.

Furthermore, an extra holiday to mark the Queen's Diamond Jubilee celebrations in June, and the assumed lost productivity around this summer's Olympic Games in London will make marked improvements to the limp economic performance difficult.

Still, the data as it stands now complicates the task of the Bank of England's Monetary Policy Committee (MPC) when it meets next month.

Having expressed concern for the "stickiness" of core inflation (the kind that ignores volatile components such as food and energy) the MPC will now have to decide if the ONS data is accurate, and thus demanding a further jolt of stimulus, or whether the underlying strength shown in the monthly surveys points to the kind of growth that would allow it to pull back on its asset purchase programme.

The American-born Posen, a long-standing proponent of so-called "dovish" monetary policy, voted in April for a pause in the Bank's quantitative easing strategy. His change in tact has investors betting that the Bank may seek to increase interest rates earlier than expected if the UK shows signs of improvement in the second half of the year.