Today sees or if you read this later will have seen a multitude of economic growth or Gross Domestic Product numbers released across Europe. For example we have already seen some from Spain so let me open with what was in 2014 a good news story.
The Spanish economy recorded a quarterly growth of 0.7% in the fourth quarter 2014. This rate is two higher than that recorded in the third quarter of tenths (0.5%).
– The growth compared to the same quarter last year stood at 2.0% vs. to 1.6% in the previous quarter.
These are numbers which confirm the initial estimates and if true mark a turn for the better in Spain. But my theme today which is one that regular readers will be familiar with is can we trust the numbers? To be more specific I am troubled by the deflator series which is the measure of inflation used to turn nominal GDP numbers into the real GDP figures which I have quoted above. I have pointed out before that it has been erratic and inconsistent in Spain particularly in 2011 and 12 ( the later revisions totalled some 1.1% if my memory serves me correctly) and worry that at a time of negative inflation more issues may emerge.
, the implicit deflator of the economy presents a variation rate of -0.6%, three lower than in the third quarter (-0.3%) tenths.
The UK Implied Deflator
Yesterday I attended the Public Meeting to discuss the Paul Johnson Inflation Report. There was a wide-ranging discussion partly in response to my questions but there were others of note also. Sadly Paul Johnson was unable to continue the debate as instead of there being another Question and Answer session as scheduled he declared that he had a diary clash and left at 4.34 pm. I guess that maybe we should be grateful that the soon to be Sir Paul was able to spare us that much time.
However there were issues raised about the UK Implied Deflator which are important. A major one was raised by Dr. Mark Courtney who gave a lecture on the subject of the RPI (Retail Price Index) before Christmas. The relevance here is that the usually higher RPI was replaced by the usually lower CPI in 2010. Approximately 5% already used the CPI and another 18% was added meaning that with some rounding it was 24% afterwards.
Now if you use a lower inflation measure with the same level of output hey presto you get higher real GDP and hence economic growth! In essence this is what happened from 2010 onwards. Let me use the words of Dr.Courtney as best I can recall them.
The switch changed the numbers for the consumer sector in particular and as the Implied Deflator fell below the level that using the RPI would imply there was a 0.5% per annum higher rate of economic growth recorded.
That is an interesting piece of timing as of course back then the UK was pretty much desperate for some recorded economic growth.Or as the Office for National Statistics puts it.
From Q3 2009 growth continued to be erratic, with several quarters between 2010 and 2012 recording broadly flat or declining GDP.
If we bring that forwards to today’s numbers then we could on our old measuring stick wipe this out.
UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.5% between Q3 2014 and Q4 2014
It is a little unfair however to put it all in one-quarter so let me just say that the number below would now be 2.2%.
Between Q4 2013 and Q4 2014, GDP in volume terms increased by 2.7%, unrevised from the previously published estimate.
So we would be in the same ballpark as Spain rather than thinking we had a superior performance. For those who have plugged our relative outperformance this is somewhat awkward to say the least and of course it means that we need to trim a bit off this too.
In Q4 2014 GDP was estimated to have been 3.4% higher than the pre-economic downturn peak of Q1 2008.
There followed an even more technical discussion of which type of statistical index and measuring system was appropriate for a GDP Deflator. For those of you who think that this might send someone to sleep well actually it woke up the person who Paul Johnson had sent to sleep and gave us some relief from his snores! I thought that those who rang his mobile several times were a little cruel. However that discussion ended again with the point that the GDP deflator was usually the lowest inflation number these days. Just as a reference here is the latest reading and please remember all the other inflation measures were higher then.
The gross domestic product implied deflator at market prices for Q4 2014 is 1.1% above the same quarter of 2013.
Royal Bank of Scotland
This may seem an unusual issue to raise but my point is that in the pre credit crunch era it was one of the powerhouses driving the UK economy forwards into a new economic era. Hence it apparently helped push economic growth higher. Now let us move forwards to this morning.
UK state-owned bank RBS has reported £3.5bn loss for 2014, down from £9bn loss the previous year.
The results were hit by a £4bn writedown on the sale of its US business Citizens.
In addition it plans to continue to deleverage and contract over the next year.
RBS said it had reduced costs by some £1.1bn and will cut another £800m this year.
Wasn’t last year’s figure supposed to be of the “kitchen-sink” variety so that the new Chief Executive could stride powerfully into the future?How can it lose money with the favourable way banks are treated via for example the Funding for Lending Scheme of the Bank of England. But more pertinent to today’s subject is how much of the economic growth recorded prior to 2007 was a mirage or an illusion?
The rewards for failure go on as Sir Howard Davies was only recently announced as RBS Chairman. I guess his resignation from the board of my alma mater the LSE due to links with Libya and Gaddafi are a mere bagatelle to our establishment or his tenure at the FSA.
The problem that is/are rents
Paul Johnson recommended that CPIH where H equals housing costs be the UK’s premier inflation measure going forwards. A little care is needed in this as he showed a way of getting an ever lower inflation reading in his presentation and that may be along soon. However so far CPIH has been a national scandal and a disaster as my past blogs have identified and it fails this test established by the Royal Statistics Society.
Understanding and faith in published statistics are incredibly important as is the long historical record that the RPI represents.
Derek Bird who sadly for him always seems to get the job of defending the indefensible poor man presented the new improved CPIH. It looked very different which poses a challenge to those who told us all was fine and recommended it! I will leave the critique to someone from the audience who asked this question.
Did you find any owner occupiers who knew what the rental value of their property was?
There is much to consider here as we examine the issue of how inflation is measured in our national accounts. There are competing and differing views on its treatment. However if we step back for a moment and look at the fact that our GDP performance was raised by 0.5% per annum due to statistical switch from RPI to CPI there is an issue. Why not publish both? Is it because we might in Victorian terms scare the horses? Also this is far from the only statistical change as we review the effect of ESA 10 which was applied last autumn.
Average revision to level of GDP 1997 to 2009 is
Whilst we need to update our numbers from time to time there seems to be an awful lot of such “improvements” going on and always we have lower inflation and higher economic growth as a result. Surely by the laws of probability something must one day happen which reduces growth and raises inflation? As to enquiries and reports well I remember the words of Sir Humphrey Appleby.
You never interfere with a member of Her Majesty’s judiciary. What you do is appoint someone who does not need interfering with in the first place!
Released this morning.
The Office for National Statistics has today announced that Quarterly National Accounts data consistent with the 2015 Blue and Pink Books that were due to be first published on 30 June will now be published on 30 September. The Blue and Pink Books themselves will now be published on 30 October.
Eurostat has written to all EU member states stipulating that all outstanding Gross National Income (GNI) reservations pertaining to their national accounts need to be addressed by 22 September 2015. GNI is closely involved in the calculation of member states’ contributions to the EU budget. Accordingly, ONS will work with Eurostat over the coming months to meet this deadline.
Oh and just to be clear I do not blame the ONS for this,they are merely the foot soldiers and the puppet-masters are to be found elsewhere.