But the picture on activity in 2009 Q4 is still far from clear. Of the three approaches to measuring GDP – output, income and expenditure – the ONS considers that, in the short term, the output measure provides the most accurate guide. Until the National Accounts are ‘fully balanced’, which takes around two years, the ONS makes an alignment adjustment to both the income and expenditure measures so that all three approaches provide a single estimate of growth.

Under the expenditure approach, where GDP is the sum of consumption, investment, government expenditure, net trade and the change in inventories, the alignment adjustment is included within the headline estimate of the change in inventories. Data published this morning show that, according to the headline estimate, the change in inventories contributed 0.7 percentage points to the 0.4% growth in GDP (see my chart below). But within this 0.7 percentage points, 0.5 percentage points was the alignment adjustment. What does this mean? Well, the alignment adjustment is included within the change in inventories for a reason – within the expenditure components of GDP, the change in inventories is particularly hard to measure. So the true contribution of the change in inventories may be as much as 0.7 percentage points, implying that growth in final domestic demand was approximately zero, with net trade subtracting 0.3 percentage points from growth. Another option is that another component of expenditure, such as investment or net trade, was actually stronger than current estimates suggest, which should be seen as good news. Alternatively, the output estimate might be wrong, and growth could be less than 0.4%.

 

 

Let us take the headline estimate of the change in inventories at face value for the moment. If the expenditure breakdown during 2009 Q4 really was as this morning’s data suggest, then the UK economy looks weak going into 2010 Q1. The two sources of growth were government consumption, which will come under pressure after the election, and the household sector. Household expenditure grew by 0.4% in 2009 Q4. But within the total, expenditure on transport, which includes purchase of motor vehicles, grew by 2.4%. Growth in household expenditure excluding transport was zero. That is stronger than the 0.2% fall recorded in Q3, but still far from encouraging as the car subsidies come to an end.