Finally UK GDP per capita gets back to the previous peak

Today provides an update on UK economic growth in the second quarter of 2015 as the Gross Domestic Product numbers are released. Over the weekend we discovered that al according to the Sun Newspaper a member of Her Majesty’s Peerage allegedly spent an evening putting in a maximum effort to boost the numbers. The Sun described the alleged event in its own inimitable style.

FORMER Labour minister John Sewel’s downfall came after he was caught on film snorting cocaine with a pair of £200-a-night hookers.

Lest we forget just under a year ago the UK National Accounts were brought into line with ESA 10 which includes the section below.

Changes designed to improve comparability of estimates of Gross National Income include the introduction of household expenditure on illegal activities, including spending on illegal drugs and prostitution.

Even in these inflated times the numbers involved are substantial although they are for obvious reasons open to the challenge how do they know that?

the increase in the level of real GDP in 2013, for example, is approximately £12.3 billion, less than 0.75% of total UK GDP. Within this total, prostitution accounted for £5.7 billion, equivalent to around a third of a per cent of GDP.

Perhaps once he is finished helping the Metropolitian Police with their enquiries Lord Sewel could help the UK Office for National Statistics with theirs?

Although sadly the impact on our trade figures is in the opposite direction.

The modest downward revisions to the trade balance prior to 2005 reflect the inclusion of imported illegal drugs in the National Accounts for the first time (the vast majority of illegal drugs that households consume are assumed to be imported from overseas),

So we move on with the reminder that just under a year ago the recorded  size of the UK economy expanded due to methodological changes  when nothing changed in reality. Did you feel wealthier or better -off? Also as we go forwards it seems that the phrase “drunk as a Lord” may well need some methodological changes of its own!

How is the UK economy doing?

Yesterday provided evidence from the Confederation of British Industry that manufacturing was continuing to grow.

33% of businesses reported an increase in total new order books, and 24% a decrease, giving a balance of +9%……..26% of manufacturers expect total new orders to increase, and 18% expect them to decrease, giving a balance of +8%

However the rub was that whilst domestic demand was good the demand from exports was weakening and to one area in particular. It would appear that the UK Pound’s rise against the Euro is having an adverse effect.

Manufacturers believe their competitiveness in the EU continues to fall sharply (-21%).

As a counterpoint to this the actual GDP release was in fact much more downbeat about UK manufacturing.

a fall of 0.3% in manufacturing following an increase of 0.1% in Quarter 1 (Jan to Mar) 2015.

Not much of a “march of the makers” was it as they appear to have been marching in the wrong direction?!

Today’s GDP release

Firstly let me credit the NIESR (National Institute for Economic and Social Research) as it had accurately foretold this a while back.

GDP is estimated to have increased by 0.7% in Quarter 2 (Apr to June) 2015 compared with growth of 0.4% in Quarter 1 (Jan to Mar) 2015….GDP was 2.6% higher in Quarter 2 (Apr to June) 2015 compared with the same quarter a year ago.

So the first message is of an improvement on the preceding quarter albeit that the year on year growth rate dipped a little. We should welcome that as the UK badly needed the present growth phase which has allowed us in aggregate terms to finally move forwards after the credit crunch recession.

In Quarter 2 (Apr to June) 2015, GDP was estimated to have been 5.2% higher than the preeconomic downturn peak of Quarter 1 (Jan to Mar) 2008.

What drove this forwards? Well we already know it was not manufacturing and we are left mulling the promised “rebalancing” one more time as Daft Punk might say.

Services increased by 0.7%, contributing 0.5 percentage points to Quarter 2 (Apr to June) 2015 GDP growth.

If we look into the detail we see that an “old friend” was the leader this time around.

Growth in business services and finance increased from 0.1% growth in Quarter 1 (Jan to Mar) 2015 to 0.8% in Quarter 2 (Apr to June) 2015.

Also we saw that the predictions of a decline in North Sea Oil and Gas output need to be put on hold for a little bit.

with mining and quarrying increasing by 7.8% following a decrease of 0.5% in Quarter 1 (Jan to Mar) 2015

That shows the strong impact of tax changes in such an area I think and it meant that in spite of the disappointing manufacturing data production increased by 1% in the quarter.

We now reach a very troubled area and by this I mean for the collection of the data as much as the numbers themselves.

Construction output made no contribution to Quarter 2 (Apr to June) 2015 GDP growth. This follows a fall of -0.2% in Quarter 1 (Jan to Mar) 2015.

This series has varied between being troubled and a shambles in recent times and whilst the statisticians are doing their best I am afraid that a lot of confidence has been lost in them. On a personal anecdotal level with the area between Battersea and Vauxhall being a veritable forest of cranes the numbers seem odd.

Also we need to do better with agriculture I think as we can grow plenty of food in the UK and it would help the trade balance too if we did more of that.

Agriculture output decreased by 0.7% in Quarter 2 (Apr to June) 2015, following a decrease of 2.3% in the previous quarter.

What about illegal activities in housing?

This subject has arisen in recent days or to be more specific we have seen something of an echo of this from Ben Judah back in March 2014 in the New York Times.

The Russians also understand this. They know that London is a center of Russian corruption, that their loot plunges into Britain’s empire of tax havens — from Gibraltar to Jersey, from the Cayman Islands to the British Virgin Islands — on which the sun never sets.

Of course it is not only Russians who are allegedly involved in such activities and the Guardian has provided an update on the possible scale here.

One in 10 properties in the City of Westminster, central London, are estimated to be owned by companies registered in an offshore secrecy jurisdiction, according to Transparency International figures provided by Downing Street, while £120bn worth of properties in England and Wales are owned offshore.

Of it is unknown how many are legitimate and we also have a conceptual problem. Are some illegal activities more equal than others?

Comment

The issue of how to treat GDP statistics has been brought more to the forefront with the advent of the credit crunch. One counterpoint to this is to move from the aggregate to the individual level where we see quite a different position.

The 0.7% increase in GDP growth in Quarter 2 (Apr to June) 2015 implies that GDP per head would be broadly equal to the pre-economic downturn peak in Quarter 1 (Jan to Mar) 2008.

On that road 5.2% higher morphs into “broadly equal” as we mull matters such as the fall in real wages, the cost of living crisis and individual experiences.

So we start with “Reasons to Be Cheerful” but as we move along our journey there are problems. The move from aggregate to individual discussed above is one but we have seen others with the problems with the construction numbers. Then I note that the “March of the Makers” has been backwards as we shift one more time towards services rather than the rebalancing away from them so beloved of former Bank of England Governor Mervyn King.

This is before we reach the usual litany of problems with using GDP numbers as a measure of economic wellbeing which I have documented many times before. Also we have the fact that only 40% of the total data is available for the preliminary estimate.

Bank of England 

Tucked away in the news flurry was this as we wonder about “a good time to bury bad news”. At first I do have to confess my response was to echo Pete Townsend.

Who are you?
Who, who, who, who?
Who are you?

Anyway let me welcome Dr Gertjan Vlieghe to the Monetary Policy Committee. There are some troubling thoughts though.

Dr Gertjan Vlieghe is Partner and Senior Economist at Brevan Howard Asset Management having previously been a Director at Deutsche Bank.

Also there is the issue of what we might call an “insider” being an external member of the MPC as after all the Bank of England directly appoints five of the members already.

Prior to his move to the financial services industry, he worked at the Bank of England for seven years where he became economic assistant to the Governor, Lord Mervyn King.

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10 thoughts on “Finally UK GDP per capita gets back to the previous peak

  1. Shaun, I would want to see hard evidence that the decline in business with the Eurozone was directly a result of the stronger pound. I suspect that it is the poor performance of a number of Eurozone economies that is having the greater effect on our exports and the strong pound is simply another problem. Whilst no longer directly involved with exports to the Eurozone I still talk to one or two companies there and they are ‘treading water’ rather than growing. The fear of collapse may be muted but real confidence in the future is just not there. I only hope that businesses in the UK are really trying to expand in other markets where the pound is not so strong (or rather it is a weak Euro problem) as I think Eurozone issues are here for the long term.

    • Hi Pavlaki

      I was hopeful that the recovery in some Euro areas such as Ireland and Spain would help out with UK exports. As to areas where the UK Pound £ is not in a relatively strong phase there are not so many. One of them is the USA where I recall from recent trade figures we have been doing well, so let’s hope for more of that.

      Indeed I hope that Prime Minister Cameron’s current visit to Singapore is a sign of us expanding our economic and trade horizons rather than just PR. There have been ebbs and flows but we have been relatively stable against the Singapore Dollar post the 2007/08 devaluation.

  2. Hi Shaun

    I am somewhat sceptical of these numbers and would like to know two further bits of information specifically: inventory adjustments – which I cannot find, and changes in debt levels – which I would not expect to find in this announcement but which are I think relevant.

    Clearly if there has been an inventory build then this will flatter the figures in the quaretr but is likely to be reversed in some subsequent quarter and the indebtedness figures would show how much growth has, in effect, been pulled forward by any increase in indebtedness.

    I am also sceptical because of the evidence from almost everywhere else is of a rapid slowdown; the US may already be in recession; Europe is an enduring mess and the BRICS et al have all been affected by the commodity and oil sell offs. Things are looking somewhat less than chipper in most places and to view the UK as beacon of growth in a sea of despond seems to me almost comical. It seems to me that something is wrong here.

    • Hi Bob J

      Your inventory point is a good one and you made me think do we in the UK do that? To which the answer was no. Definitely no at this stage and maybe all the way to the final release when one may be able to figure it out if you go through all the various tables. For those who have not followed this issue then the US BEA certainly does calculate inventories from the preliminary GDP estimate as shown below.

      “The change in real private inventories added 0.74 percentage point to the first-quarter change in real GDP after subtracting 0.10 percentage point from the fourth-quarter change. Private businesses increased inventories $110.3 billion in the first quarter, following increases of $80.0 billion in the fourth
      quarter and of $82.2 billion in the third.”

      We will find out what the BEA thinks of the second quarter in the USA on Thursday.

  3. Hi Shaun,

    I’m so pleased to see that David Cameron is preparing to take a stand against the tide of foreign “investors” and the tax-efficient means by which they have gobbled up large parts of my (and your) home town.

    I want Britain to be the most open country in the world for investment. But I want to ensure that all this money is clean money. There is no place for dirty money in Britain. Indeed, there should be no place for dirty money anywhere.

    Yes sirree … it sure makes me proud to be associated with a country which is leading the way in dealing with the thorny issue of dirty money. Heaven forbid that the good name of the UK’s financial industry should become in any way discredited by creative accounting, a laissez-faire attitude to morality and the connivance of some far-away tax haven like, say, the British Virgin islands.

    Ah …

    • Hi Paul

      If you head up towards Vauxhall from Battersea you see quite a bit of new building before you hit the sweep covering the Power Station and Nine Elms which is essentially an enormous building site. Is there no building going on anywhere else?

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