As the UK’s housing boom fades so does its economic growth

Today gives us an opportunity to draw a line under 2014 for the UK economy in terms of economic growth. It was the best year that the UK has managed in the credit crunch era and saw us move decisively ahead of past output levels. Whilst we should broadly welcome such a development there was also an undercut. In essence the growth in total output compared to the pre credit crunch peak was because there are more of us in the UK as at the individual level we found ourselves still struggling to rescale the previous heights. Also we discovered at the end of the third quarter of 2014 that the previous year had been good but sadly not quite as good as we previously had thought.

Between Q3 2013 and Q3 2014, GDP in volume terms increased by 2.6%, revised downwards by 0.4 percentage points from the previously published estimate.


UK labour productivity problems

The other ongoing issue in these terms was the weakness of productivity growth which has been a troubling issue for the UK throughout the credit crunch period. The ONS (Office for National Statistics) January Economic Review summed it up thus.

However the level of output per hour remained 1.8% below that experienced in Q1 2008, and remains significantly lower than the level of productivity that would have been experienced had 1997-2007 average rates of growth been obtained.


This is how the Bank of England estimated a UK “productivity gap” which at one point reached 18% if I recall correctly. This has now been revised down to more like 12% by allowing for methodological improvements such as ESA 10 and the like but if you project the past forwards we remain a long way behind where we would otherwise have been. Of course I am sure that many of you are thinking that this may be the “new normal” and that rather than behaving like HAL 9000 from the Film 2001 A Space Odyssey we need to refine our benchmarks and analysis to adjust for the changes.

On the other side of the coin there were some flickerings of hope for better times in the third quarter of 2014.

the most recent labour productivity data published by ONS (Labour Productivity – Q3 2014) has shown clear improvement, with output per hour rising by 0.6% in Q3 2014 compared with the previous quarter. This was the strongest rise seen since Q2 2011 (when productivity rose by 1.3%) and was broad-based across the headline production and services industries.


Trade issues

Whilst the economic growth seen by the UK has been welcome it has come with a familiar issue if not friend.

Latest figures show the current account deficit widening to 6.0% of nominal GDP, representing the joint largest deficit since ONS records began in 1955.


The income accounts have deteriorating for a while and are now adding to our trade in goods deficit. Whilst the UK services sector continues to perform strongly it is being swamped by larger deficits in the goods and income sectors.

Today’s numbers

These came with a tinge of disappointment although some perspective can be gained by looking at the Euro area which would love to see such a sustained period of growth.

 GDP is estimated to have increased by 0.5% in Q4 2014 compared with growth of 0.7% in Q3 2014.


GDP was 2.7% higher in Q4 2014 compared with the same quarter a year ago. GDP in 2014 as a whole was up 2.6% on 2013.


It is hard not to have a wry smile at the fact that just as various bodies have been raising economic growth forecasts for the UK the actual numbers have been slowing. Still we are continuing to move further ahead of our past peak.

In Q4 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008. From the peak in Q1 2008 to the trough in Q2 2009, the economy shrank by 6.0%.


What about rebalancing?

Regular readers will certainly recall that former Bank of England Governor Mervyn King was very keen on this concept and publicised it in quite a few speeches. For example he regularly tried to talk down the value of the UK Pound on the grounds that we would rebalance and welcomed the 2007/08 depreciation. How is that going?

The largest contribution to Q4 2014 GDP growth came from services; these industries increased by 0.8%, contributing 0.62 percentage points to the increase in GDP.


So the services sector continues to power ahead and as we are grateful for pretty much any economic growth we should welcome it but production?

There was a downward contribution (0.02 percentage points) from the production industries; these industries fell by 0.1%.


So if anything we are seeing a rebalancing away from production to services in spite of the fact that UK manufacturing if looked at on its own edged forwards.

and a rise of 0.1% in manufacturing following an increase of 0.3% in Q3 2014.


However you may note that the growth in UK manufacturing was slowing whereas services continue to power ahead. If we look back for some perspective we see this.

In Q4 2014 output from services was 7.9% above its pre-economic downturn peak in Q1 2008.


Perhaps there was a misprint in Mervyn King’s first speech which somehow got copied over to the others and he meant to say rebalancing towards services rather than away!

Services are the only sector of the UK economy to regain their past peak and as you can see above they have surged past it. If we look into the detail of the recent surge we do get hints of housing based growth although caution is needed as the categories are broad.

The index for business services & finance increased by 0.9% in Q4 2014, following an increase of 1.0% in the previous quarter. Architectural & engineering activities made the largest positive contribution to the increase. Between Q4 2013 and Q4 2014, business services & finance output increased by 4.0%.


What about the UK housing market?

We have seen more data released by the British Bankers Association today and as an organisation with a clear vested interest one would expect the report to be as upbeat as possible.

The mortgage market has been softening since the spring,


Okay and business lending?

Outstanding business lending has been falling as larger firms have used the bond market rather than borrowing from banks. Despite this, outside real estate businesses are generally expanding their lending.


So if we exclude what’s falling then business lending is rising?! Still there is one sector which appears to be booming.

Annual growth in unsecured borrowing is currently 3.8%, the highest rate since late 2008.


What could go wrong?


First let me be clear that the UK has had in international and absolute terms a much better and indeed good couple of years on the economic growth front. It is easy to forget now that there were genuine fears of a “triple-dip” recession back then. Not only did it not happen but the UK economy pushed forwards and 2014’s level of GDP growth of 2.6% is very welcome. Even now whilst growth has been slowing we have just seen quarterly growth of 0.5% which is much better than we will see in Europe overall. As 2015 progresses we will see the benefit of the oil price fall feed into UK economic growth giving us a boost.

Whilst all this has been welcome the truth is that many familiar problems have emerged. In many respects this has been a traditional UK boom based on the housing market. The Bank of England pushed the start button with its Funding for (Mortgage) Lending Scheme or FLS in the summer of 2012 and the UK housing market and then the UK economy responded. What would we expect to see in response to that? That would be inflation and problems with the balance of payments. We certainly have the latter as the chilling ” joint largest deficit since ONS records began in 1955.” phrase echoes. As to the former we have seen that in the housing market as shown below.

UK house prices increased by 10.0% in the year to November 2014.


We do not see it in the consumer inflation numbers for two reasons. Firstly the UK establishment at around the same time as it set out to pump up the housing market decided to abandon its past methodology of aligning with Europe and to exclude house prices from its measure of housing inflation. How very Sir Humphrey! Secondly the oil price fall has masked the UK’s tendency towards administered inflation for now anyway.

So in summary Winston Churchill’s words echo somewhat here.

It is a riddle wrapped in a mystery inside an enigma;but perhaps there is a key.


The key is the housing boom.

Before I end this piece of analysis I have two reminders. Firstly that today’s initial GDP estimate is based on only 44% of the data and the last month (December in this case) is pretty much all guesswork. Secondly that as I have written many times before there are a litany of issues with relying on Gross Domestic Product as your measure of economic health and well-being.




18 thoughts on “As the UK’s housing boom fades so does its economic growth

  1. Hi Shaun, another excellent “subversive” article.
    Why subversive?
    Well, because the government is doing everything it can to talk up GDP in the hope that it’ll become a self-fulfilling prophecy.
    Let’s look at childcare.
    Frees up more people to be debt servants.
    So we have parents going out to work, add that to GDP.
    We have kids being looked after, add that to GDP.
    But weren’t those kids being looked after PRIOR to the childcare?

    • Hi therrawbuzzin

      One of the issues with GDP is as you say economic activity being shifted from something which is not counted to something which is. Hey presto! You have (recorded) economic growth via GDP. The example used to be everybody suddenly paying someone else to cut thier grass rather than doing it themselves which boosts GDP but of course leads to an unchanged reality.

      Why do politicians like it? Twofold. firstly they can tell us we are better off and bask in the reflected credit and secondly they can tax the new gains…

  2. If we want to rebalance the economy and shrink the balance of payments then we need the good people of these Isles to buy the products we produce. The consumers are by far and away the largest part of our economy and the government is relatively powerless compared to them.

    Now we cannot all have Jaguars and Lotuses but we could buy Dualit toasters and Henry vacuum cleaners etc. It’s actually surprising what we do make. There is a firm in Bolton that make running shoes in the UK. The Raspberry Pi is now made in South Wales. Check where your cleaning sponges are made, quite a few companies make these in the UK.
    I am very fond of the Dutch but why do we get so much food from them when our climate is actually better for growing the things we import off them?
    Support our wool industry etc etc.

    Ikea doesn’t help either. I have yet to see a single UK made product in their stores. The big supermarkets are starting to get better at this.

    To be fair to the Chinese there is a desire for UK products over there in the richer income groups. We seem to be completely unable to sell anything to India though. They certainly make it very hard. I would be interested to see counter examples.

    Regarding the lending to Businesses, does this include things like Kickstarter? I have seen a number of small companies bypass the banks completely by doing micro-crowd funding in order to invest in equipment. A dairy farm in Wales did this recently so they produce Buffulo cheese and ice-cream.
    Companies like Ecotricity just issue Bonds directly themselves to fund projects.

    • To be fair, Dualit toasters and Henry vacs are shite.
      Dyson used to be British, but I wouldn’t touch that traitor’s merchandise with a bargepole.

  3. Great column, Shaun.

    Mark Carney (Barker) has been bragging about the UK having the highest growth rate of any developed country or G-7 country or whatever it was, so I was curious if the 2014 estimates would show the UK with a higher growth rate than Canada. StatCan isn’t so quick off the mark as the ONS, and Q4 estimates aren’t available yet, but the Bank of Canada’s GDP forecasts (backcasts?) in January show an annual growth rate of 2.5% for 2014Q4 and 2.4% for 2014 as compared to 2013. So for now at least, it looks like the UK did have more growth in 2014 than Canada, I don’t know about the US. One thing to remember about these real GDP estimates is that there is a formula bias in favour of higher growth rates for the UK as compared to Canada or the US, since the UK, like the rest of the EU, calculates chain Laspeyres volume aggregates, whereas Canada and the US calculate chain Fisher volume aggregates.

    • Hi Andrew

      So it is not just the RPI/CPI relationship which has a formula effect? I am intrigued about the GDP comparison as I do not recall that being mentioned before. Can you give us an estimate of what the difference might be between a “chain Laspeyres” GDP and a “chain Fisher” GDP?

      • Shaun, yes it is a formula effect very much like the formula effect that distinguishes the RPI from RPIJ, and even the properties of the formulas involved are similar. The Carli formula used in the RPI doesn’t pass the time reversal test, unlike the Jevons formula used in the RPIJ. The Laspeyres formula used, with chaining, in European GDP measures also doesn’t pass the time reversal test, unlike the Fisher formula used, with chaining, in North American GDP measures.
        The attached New Zealand paper shows what the magnitude of the formula effect is likely to be:

        For total GDP the formula effect is never more than 0.2 percentage points. For particular components, e.g. crop production, one is likely to see a more important formula effect. The point is that now the US GDP estimates are out they show an annual GDP growth rate of 2.5% for 2014Q4 and 2.4% for the year 2014. George Osborne could, and probably will, say that this gives the UK, with its 2.7% growth for 2014Q4 and 2.5% for 2014, the highest real GDP growth rate of any G-7 country for 2014. However the formula effect alone may be sufficient to erase the difference between the growth rates, never mind any other differences in methodology.

  4. I suspect GDP per capita has not been as impressive?
    I also suspect that if it were not for the string of conditions and policies deliberately enacted to stimulate GDP we wouldn’t be where we are.

    1. ZIRP
    2. QE
    3. FLS
    4. H2B

    Unravelling any or all of these would probably push us into recession again, so if we normalise we are technically still in the ICU!

    • Hi Anand, – and Shaun,
      I’m not so sure these policies were aimed at stimulating GDP. I think their prime purpose was to stop the banks from actually going bust. Improvement in GDP is a side effect. Any unravelling will be a sign the banks are out of ICU.

      As I remember, the BoE originally justified QE on the grounds of inflation – which was then both ignored and redefined.
      And, as has been demonstrated, house price inflation and the tools to boost it have benefits all round. Borrowing money at 4% to buy something that’s rising in price at 10% (roughly). It’s incredible.

      So I wonder how much of the recent growth is phoney and how much is real. Either way, Sir Humphrey would be impressed.

  5. I am rather more interested in our relative GDP performance than the absolute numbers. By that I mean relative to other developed economies. Most governments and central banks are applying stimulus of one form or another so it only remains to be seen if ours is working better than theirs. It’s a funny economic world these days. I would rather look at employment / unemployment numbers, wages in absolute terms and growth and finally balance of payments.

    When I hear our ministers lecturing Europeans I am reminded of the time Gordon Brown was on his high horse as chancellor giving advice to the Germans. The reply was that Britain was building an economy based upon cutting each other’s hair but we prefer to make things. History shows who was right!

    • Hi Pav
      Who has the highest income/wealth inequality in Europe? Whose unemployment numbers are completely obscured by ‘mini-contracts?
      Personally wouldn’t want to live in Germany.

  6. Hello Shaun ,

    The trouble with GDP is that most of the numbers that go into it are fairy dust and unicorn poop!

    on the subject of 44% I guess we could use a bench mark figure to estimate ( estimate on a estimate !) the other 56% based on how much correction was needed ?

    I agree GDP is bunk though , partly because of the “estimates ” and “presumptions ” ( just how big is our hooker and coke industry ? both are illegal!! ) but mostly that we can have fly away GDP growth but tax revenues crater ….. erm , like we have now ?

    Frankly its the difference in what we ll to what we buy and what we get in tax to spedning that shoulde be looked at but they aint too good are they ?

    Another point is fix cost spending based on GDP , 0.7% for international aid comes to mind ( an EU contributions ) . If GDP is fantasy then the real cost of both impacts our debt – didnt we borrow the money to pay both off , and at a higher rate, because we included the Sex & Drugs services ( and we guessed the impact of both ) …….. isn’t that just crazy ? Somebody tell me theres a better way , please !



    PS: isnt borrowing to pay bills just paying twice? erm, lets hide the popcorn!!

    • Hi Forbin

      Our higher payments to the European Union are also based on our higher reported growth. You may note that these are things which mostly benefit our political class more than us! Whilst I support the fact that we should provide some foreign aid I would do it in cases of need and poverty whereas much of our goes to prop up corrupt regimes.

  7. Shaun, All accurate commentary however we are in “steady as she goes” waters as we head in to pre-election mania. Nothing but nothing will be allowed to upset the cart for 2 months, except perhaps a snow dump/act of god and then we will have the cold snap to blame for a dip in Chinese buyers of London property and low factory output.

    As for MK and hie “re-balancing”, you know it is crap when its uttered from a podium to sycophants and the concept never entertained in critical analytic discussion. We have Carney coming out with similar platitudes.

    Syriza and Podemos are our best chance of upsetting the status-quo, but rising from the south the movement has to come along way to reach blighty.

    Paul C

    • Hi Paul C

      Actually it took Mark Carney less than 24 hours to fulfil your prediction. From his speech tonight.

      ” the UK has a highly credible monetary policy framework.”

      “the (UK) economy has grown consistently above trend,”

      If only someone in the audience would ask him to define his terms and critieria!

  8. I checked and the US annual real GDP growth rate for 2014Q3 was 2.7%, i.e. the same as the UK’s rate for 2014Q4. The quarterly growth rate for 2013Q4 was 0.9%, so quarterly real growth in the US economy would have to be less than that in 2014Q4 for its annual 2014Q4 growth rate to be less than the UK’s.

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