Friday, February 04, 2011

Did the UK economy really shrink last quarter??

Had an excellent few days in Harvard, also seeing Elder Daughter and family. There had been lots of snow (although none fell when we were there) creating a rather surreal effect with piles 4-6 feet high by the sides of the streets: one turned out on closer inspection to have a car buried underneath it.

I've already blogged about the cosmology: we also made some pretty important steps forward in our scientific work on financial stability, but not bloggable.

I really doubt whether the UK Economy did shrink in Q4. Looking closely at the statistics of ONS revisons to their preliminary estimates, it's clear that there's a significant fat tail of upwards revisons. If the prior probability of the economy shrinking in Q4 was less than 10% then the posterior probability that the economy shrank is about 50%. I think it is less that that, but we shall see: the first revisons come out later this month. Some leading economics commentators in the UK didn't seem to understand this point, but are now at least thinking about it. Of course the brilliant Philippe Aghion, who I saw on Monday at Harvard, gets it immediately. The Economist poll of forecasters has only reduced its growth estimate for the UK by 0.1% so they don't believe it either.

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