Week 11, 2013: The Index of Production vs GDP

Summary: It was announced this week that the Index of Production, a general measure of the output of the manufacturing industries, fell by 1.2% in January. This has prompted a wave of predictions that the UK is heading towards a triple dip recession. To assess whether that is reasonable, we've compared the index of production with eventual GDP numbers in this week's chart.

What does the chart show? The chart compares the Index of Production with GDP.  The blue line shows the month-on-previous-month percentage change in the Index of Production for the first month of each quarter (including the latest figure from January 2013).  The red line shows the quarter-on-quarter percentage change in GDP.

Why is the chart interesting? In most cases over the past 7 years at least, the early production data has been a fairly good indicator of roughly what to expect from the eventual GDP numbers.  This makes some sense; after all, production is usually a fairly large component of the final GDP numbers. On that basis alone, it does look like we're heading towards the second consecutive quarter of negative GDP growth which would signal the dreaded triple dip.  However, it is by no means a perfect indicator.  For example, the early production data from the middle of 2007 looked bleak, and yet we continued to experience strong growth.  On the other hand, the production figures for the beginning of the second quarter of 2008 looked promising, but they didn't stop us falling in to arguably the worst recession of the modern age.

In both of these cases, it was the service sector that either saved the economy or dragged it down. If we want to avoid a triple dip recession, we'll have to hope that the service sector experiences strong growth this quarter.