What do today’s UK GDP numbers tell us about the state of our economy?

Today give us an opportunity to peer under the bonnet of the UK economy or at least that part of it which relates to the Gross Domestic Product statistics. Along let me put in a note of caution early as the initial release from the Office for National Statistics only includes around 40% of the data that will be found in the final one. That is the price of being one of the most prompt producers of GDP statistics. This particular race is invariably won by quite some distance by China who produced numbers some days ago, but of course they come at the price of reduced credibility.

Oh and the numbers will only be news to the majority of us as the UK establishment were told at 9:30 am yesterday. At least 47 people were made aware of the data then as some roles such as Deputy Governor of the Bank of England have several occupying the role. Indeed under Mark Carney there has been some inflation here. it is good that these people have a record of impeccable discretion and a proven ability to keep their mouths closed is it not? Oh hang on…..

The problems of using GDP

These in essence come from what it is. You see it is a measure of the value of the output from an economy over a particular time period. The first issue is that it does not have any quality component as any £1 is equivalent to any other £1. Also it includes the depletion of natural resources as a gain so that Australia’s increasing mining of Iron Ore for example has boosted its GDP numbers. But there is no entry there allowing for the fact that such resources are finite and that in balance sheet terms there is less Iron Ore in the ground. Another issue is that it does not include components which do not have a price. Putting that another way if everyone paid their neighbour to clean their house the GDP data would show a boost but in reality nothing would have changed. You may be just realising why politicians are so keen on both parents of a two parent family working and employing a childminder! On that road we see possibly a worse reality reported as a boost to the GDP numbers (and higher tax revenue for politicians to spend..).

The other issue is that GDP numbers are regularly revised so that they can be unreliable. In the ordinary course of  events such revisions are usually relatively minor. But of course the current period is anything but ordinary! Also turning points such as the initial impact of the credit crunch are invariably badly measured and see large revisions.  sometimes a long time later. We saw this only a few weeks ago as the UK credit crunch history was “improved” and revised.

If I was to pick one measure as an example of this it is that net trade will be in today’s numbers. The truth is that we have very little idea of what our trade was over that period especially in the crucial services sector. I think that if such a reality reached the general population they would be shocked. Trade figures are often substantially revised years and yes decades later as for example 2008 was last month. Please remember that when GDP numbers are poured over to the level of 0.1%.

Today’s data

Whilst we may now have passed our peak level of growth for this phase there is an element of glass half full rather than empty about the numbers below.

GDP increased by 0.7% in Q3 2014 compared with growth of 0.9% in Q2 2014……..Output increased in all four main industrial groupings within the economy in Q3 2014.
GDP was 3.0% higher in Q3 2014 compared with the same quarter a year ago.
In Q3 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008.

We have now experienced economic growth in very quarter since the beginning of 2013 in what if we look at our peers in Europe looks a strong performance.

What about rebalancing?

We are increasingly an economy based on services as the quotation below demonstrates.

The largest contribution to Q3 2014 GDP growth came from services; these industries increased by 0.7%, contributing 0.58 percentage points to the increase in GDP.

That is 83% of our growth or more than the estimated share of 78.4%.

For once all sectors of our economy grew and I particularly welcome the agricultural bit, but there was a number in which posed a question for phrases such as “march of the makers”.

production 14.6%;

It was not so long ago that our manufacturing sector alone was 15% of our economy whereas now even the whole production sector does not quite make it. This is a first world and indeed European problem not just a UK one but it does pose problems.
The march of the services sector is also illustrated by the way in which it has outperformed the rest of the economy since the credit crunch.

In Q3 2014 output from services was 7.2% above its pre-economic downturn peak in Q1 2008.

Let me also add a tinge of doubt to these numbers as you see today saw the Index of Services Report for August. Yet we also get estimates for activity in the GDP numbers for September. Can you see how changes in trend catch the numbers out sometimes on a grand scale?

A hint of a slow down?

Quarterly services growth dipped from 1.1% in the second quarter of 2014 to 0.7% this time around. That is not a trend we would like to continue.

What about per capita numbers for the individual experience?

These we simply do not have on an up to date basis. These would perhaps provide us with an insight as to why the official measure of wage growth is so weak. There are plenty of apocryphal stories about emigration from Europe to the UK but little hard data. We did get a hint from a freedom of information request which was replied to saying we were still 1.8% behind the previous GDP peak per capita in the second quarter of 2014.
So we have still to regain the past peak on this measure.

A price to pay?

Overnight there has been a casualty from the UK economic improvement which is the request that the Financial Times reported.

Britain has been told to pay an extra €2.1bn to the EU budget within weeks on account of its relative prosperity.

There were some who argued that the inclusion of aspects of the shadow economy  in the GDP number and national accounts was partly to increase the reported output of the UK so it would pay more to Europe. Whether such a conspiracy took place or not a demand has appeared at the door of the Chancellor of the Exchequer. Such payments are based on a country’s Gross National Income.
Oh and if you thought that the request to the UK was bad

 Under the rules, Greece will be required to pay €89m, and Cyprus will owe €42m.

Comment

On the surface the UK economy is performing very strongly and if we add in an official consumer inflation rate of 1.2% to the 3% economic growth rate, that is about as good as the UK ever does. In fact I think that most economic models will be mimicking the behaviour of HAL-9000 in the film 2001 A Space Odyssey as they try to allow for this. However there is an undercut which is that if we move to more individual measures we have done much more poorly and have yet to return to the 2007/08 peak. That in essence is why political trumpeting does not match individual experience and is at least a partial explanation of why wage growth has been so low.

Where this gets more awkward is factoring in the balance of payments where our current account was in deficit by 4% of GDP in 2013 and 4.5% last year gives a queasy feeling. Then there are the public finances which have failed to improve much in spite of the economic growth and in fact have got worse. Both of these will be made worse if we end up making the extra payment to Europe.

My Friday song lyrics are from Talking Heads.

And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself
Well…How did I get here?

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16 thoughts on “What do today’s UK GDP numbers tell us about the state of our economy?

  1. Hi Shaun,

    Don’t they realise the damage that the latest demand for money from Greece, Italy etc and the rebate to Germany cause to the EUs reputation? Whilst not huge in comparison with the respective nations GDP the symbolism of this of this is dreadful and will be picked up on by all anti-Europe politicians. It seems so short-sighted and inflammatory.

    • but they don’t care! The united states of Europe is Hotel California ( by the Eagles )………… you can never leave !

      Forbin

    • Hi Zummerzetman

      The situation here is a disaster in so many ways. If we look at the UK governments claim that it was an outright surprise then that is not true. We pay 0.96% of our Gross National Income and the latest revisions (ESA10 etc.) raised our GNI so a bill was coming.

      Europe however has scored an own goal by asking for more money from places that are obviously in trouble such as Italy, Greece and Cyprus. Oh and the two main countries France and Germany both benefit….

      Oh what a tangled web and all that.

  2. The HAL 9000 reference is more apt than you may think , Shaun ,

    “a “Hofstadter-Moebius loop” was created and reduced HAL to paranoia. Therefore,
    HAL made the decision to kill the crew, thereby allowing him to obey both his
    hardwired instructions to report data truthfully and in full, and his orders to keep the
    monolith a secret. In essence: if the crew were dead, he would no longer have to
    keep the information secret.”

    Here in our context, the crew is the truth !

    Forbin

    PS: Meanwhile the MSM are bleating on about the “fantastica ” ( fantasy ? ) GDP without mentioning the 40% of results are in and the major revisions that happen all the time

    It’s the Gospel truth , Sar! – next minute they all be singing the Happy song by Will pharrell ………..

    40% ? ah got it , thats the stuff they made up, like sex an drugs and fake R&D double counting ….. the rest of the real stuff they havent got a clue!

    Focus on the taxes I think , GDP has lost its Mojo …..

    • Forbin, I enjoy watching the movie but never really understood what was going in Kubrick’s head, thanks for the explanation.

      As you suggest information control and versions of truth are what is being recast in the ridiculous measurement that is GDP. Since most wealth is artificial in the UK, services and housing asset generated we get the “truths” we deserve and the mouthpieces that go with the charade.

      • Hi Guys

        I am a big fan of the Film 2001 and particularly enjoyed the ending where the astronaut that HAL cuts adrift is seen in various rooms of the monolith. However in more recent years I have discovered that rather than some great insight it was based on the fact that they were running out of money! Oh well I suppose it does not actually matter…..

        • White rooms and over exposure in the camera are indeed cheap. But hey if you going to be creative who the hell is going to fund you properly? Shaun, I was intrigued to see you with a +8 rating on the Robert Peston page, I’ve not been there for 5 years and see you “canvassing” to steal his disciples, does it work?

          Paul C.

  3. Shaun, I would take issue with a couple of your criticisms of GDP. It is surely quite false that the GDP estimates fail to take account of quality change if you are speaking of the real GDP numbers. That’s what the deflators are supposed to do. It is fair to argue that they do an indifferent job of adjusting for quality change. It is quite unfair to say that no attempt is made. Nor is it true that only goods and services to which a price is attached are included in GDP. The most prominent example is imputed rent for owner-occupied housing, but there are other imputations made. In the Canadian System of National Accounts, an imputation is made for own-account consumption of food and own-account consumption of wood, where the first would be food consumed by farm households that was produced on their farms. Now that prostitution services are included in UK GDP can we expect to have the ONS impute for sexual services provided by spouses?

    • Hi Andrew

      My apologies as I was trying to summarise several criticisms in a paragraph as this is ground that I have trod before in detail and I could have been clearer. I agree that deflator efforts are made and can be considered a quality issue. I was thinking more of the sort of thing that Jill Leyland of the Royal Statistical Society was considering here.

      “Washing machines. My current machine washes at lower temperature and uses less water than machines in the past. As far as I can see it gets clothes just as clean. But is this due to improved technology in the machine, the liquid or powder I put in it or the clothes themselves? Almost certainly a mixture. The machine seems to me to be just as reliable as the one I bought ten or twenty years ago – but the most reliable washing machine I every had was the very first, far simpler, machine, I bought in 1971 which lasted for years and survived at least two house moves, including one to France.

      What does all this mean? Quality change is very difficult, almost impossible, to assess. I think the need is to be cautious when assessing new products and perhaps the default should be not to adjust unless there is a clear case for it.

      Oh, and I am glad I am not a prices statistician!”

      Also I was meaning quality in a much looser sense to cover what I would call “good” and “bad” GDP. For example bad GDP is the reconstruction after the tsunami in Japan where work is happening yes but no allowance or subtractions are made for the losses. A type of wealth measure is also required I think.

      I agree that it would have been better to say prices and areas where they feel they can impute prices. On that subject have you seen the changes made to the deflator for imputed rent? That whole series may well be heading down the road that CPIH has trod.

  4. To me, Shaun, the most salient point of this article is within the Comment section – “balance of payments”.

    That GDP is used as the criterion for assessing a member country’s dues to the EU is, from a commonsense point of view, ridiculous. That GDP is used as the criterion for assessing the health of an economy is, if only in the longer term, a fundamental flaw of academic economics. A flaw that, it seems to me, has sown the seed of the last straw contributing to the downfall of The West.

    To my mind the only relevance of relative GDP is to tax take; in which case including aspects of business which do not contribute to the Treasury is utterly meaningless. As is GDP without reference to per capita. As is GDP without reference to Budget Deficit.

    It would seem commonsense to me to assess a member country’s dues to the EU by Balance of Payments; the greater the surplus the greater the dues and vice versa. But then that wouldn’t have been in Germany’s interest, would it now?

    The Germans aren’t stupid.

      • Hi Critic Al Rick

        Back in the dim and distant past governments measured themselves by trade flows under the mercantilist system via the acquisition of precious metals. Now many argue that trade flows under fiat money and floating exchange rates are pretty much irrelevant. I do not think so and can only agree with you that the UK should have argued for a wider measure of economic well-being.

        Where is all the supposed influence that we keep being told we have in Europe?

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