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%.
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”.
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.
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?