Did construction really propel the UK economy this spring?

I have just spent a gruelling chunk of the morning trying to square the GDP figures with the construction output figures, dogged by a mild hangover and a glitch in the numbers.

I hadn’t intended to dive into the figures until a bit later, but I took a “have you seen the figures?” call this morning and so was obliged to get the brain in gear a shade earlier than it felt necessary.

The thing is that a huge slice of the unexpectedly strong 1.1 % GDP growth in the second quarter was down to construction. The nation’s statisticians reckon construction growth pumped up GDP by 0.4%, with business services and finance contributing a similar amount of oomph to economy.

So I guess it is important to assess whether the estimate for construction is reasonable or not.

Certainly the GDP growth figure was well ahead of – roughly double – the consensus forecast, which was bound to raise eyebrows and questioning.

Indeed, a note put out by Benjamin Williamson, senior economist at the consultant CEBR, put the 1.1% growth rate in the “quite implausible” bracket.

He doesn’t have an issue so much with where this growth takes us to in terms of the level of GDP output rather he believes earlier estimates of growth were underplayed, so this may just be a catching up with reality.

I tend to think he has a case with the rather pallid growth rates posted by the ONS for the business services and finance sector. You only have to see the jobs figures and the rapid rise in the number of US citizens working in the UK to begin to suspect that the recovery within chunks of the financial services sector was gathering pace by mid 2009. But ONS does not have it returning to growth until the final quarter of 2009.

He also seems pretty sceptical about the contribution construction is supposed to have made to GDP in the second quarter. And who can blame him? A rise of 6.6% in output quarter on quarter is a rare beast even for construction. You have to go back to the 1980s boom to see construction growing at that rate.

But me? I am less sceptical.

Fortunately I am also now a bit less baffled than I was a couple of hours ago before I realised there was a minor glitch in the latest current price construction output data.

Here is how I see it.

The construction output figures are not directly used in GDP – at least not to my knowledge. But there will be a strong relationship with the growth figures used.

So looking at the constant price data for construction, and trusting in the deflators being used, we see that construction work plunged in January and was very lacking in lustre in February. There was a surge in March and some pretty strong performances in April and May.

For my money this pattern of work probably has much to do with the effects of the fun but unproductive snowy weather early in the year. March’s upswing is probably partly down to the catching up on work not done in January and February and the effects of this might have stretched beyond March.

This pattern sits on the otherwise upward trend in activity created by hefty public spending which has helped construction out of a nasty downward tailspin, if only temporarily.

So for me a sharp rise of 6.6% in the second quarter, while unusual, is not out of the question, assuming there are no major revisions to the existing data.

If we expand pro rata the work done in April and May for the quarter as a whole, we see a rise of almost 10% quarter on quarter.

Now chances are that the June figure will be down on those of April and May, given the noises coming out of the trade surveys, so the quarter figure is likely to be well below 10%.

And by the time you add in a bit of seasonal adjustment the 6.6% figure does start to look not unreasonable.

What is more interesting is that, given the data already posted, construction output growth in the second quarter could quite easily prove to be above the 6.6%, revisions aside. So it is feasible that the contribution of construction to the GDP growth figure could be revised up. Now that would unsettle a few more people if it also led to an upward revision of GDP growth.

Anyway why does this all matter?

Well if you want to see the Government’s capital budget preserved and less savage cuts to the amount of public money spent on construction, we need to see some impressive GDP growth figures.

And 1.1% growth is impressive. We have seen that level of quarter on quarter GDP growth just three other times this side of the Millennium.

Sadly, while we might have seen impressive growth in the second quarter of 2010 propelled by strong growth in construction, its contribution from there on in might well prove more negative than positive.