Today I wish to go deeper into a critique of trade and balance of payments statistics in the same way that I have done in the past with economic growth or GDP (Gross Domestic Product) numbers. This was partly triggered by Friday’s trade data release where I appear to have been the only person who both read as far as table 17 R and gave it some thought. Also let me point out that this is a further critique of the culture of analysing GDP numbers down to 0.1% because via net trade we see that the trade figures are an important factor.
To give some perspective one of the biggest events in modern UK economic history the 1967 Pound £ devaluation was unneccessary but it took a couple of decades for us to realise that. Poor old Jim Callaghan who was Chancellor back then, and the famous Harold Wilson “the pound in your pocket” speech need never have been made. Actually with Denis Healey in the news for sad reasons last week and Rest In Peace to him there was a reminder that his 1976 trip to the IMF and its coffers probably was not necessary either. The headlines talk about the PSBR (Public Sector Borrowing Requirement) measurement problems but have forgotten that back then the trade numbers were pretty much its twin.
A poor record but let me throw in an extra titbit especially for younger readers which is that trade figures really mattered back then. Part of this was due to us having a fixed exchange rate in 1967 but the importance remained for years and decades afterwards before we decided in the modern era that we know better.
The official view is below from the ONS.
The UK Trade in Goods figures are one of the strongest data sources available in the UK statistical system. The overseas trade statistics, upon which the UK Trade data are based, have been collected by HMRC for over 300 years.
Just over a year ago there were fundamental changes to UK economic measurement and the Balance of Payments was affected by one of the (in)famous changes to GDP. From the UK Office for National Statistics.
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),
Oh and downward revisions makes it sound good doesn’t it? But the much bigger shift came from our banking and finance sector.
A change in the implied interest rate charged on foreign loans with UK banks, which revises down the implied margin that UK banks obtained on loans overseas during the downturn;
Seems rather technical but it was the major factor in our Current Account deficit being revised upwards by 0.7% in 2008 and there was a bigger shark in the sea.
Put simply, the earnings of MFIs are now assumed to exclude trading losses and ‘provisions for bad and doubtful debts’, which both rose sharply during the 2008/09 global financial market shock.
Look what the combined effect of these changes turned out to be.
more marked downward revisions during the economic downturn (2.9% and 1.5% of nominal GDP in 2008 and 2009 respectively)
There are two disturbing elements to this. Firstly important numbers in our large finance sector are “assumed” and secondly at time of supposed computer and IT advances apparently we had little idea of what was going on in banking sector trade as recently as 2008! This begs the question of whether we are doing much better now. What could go wrong?
The August revisions
There were some extraordinary revisions in this months data which I now want to run through. On Friday I pointed out the impact of Imputed Rent changes for companies as a result of the UK property boom.
The impact increases gradually over time with an upward revision to exports of services of £0.5 billion and imports of services of £3.5 billion in 2014, leading to a reduction in the trade in services surplus by approximately £3.0 billion.
Oh and by the way they did thank me for pointing out the error in the original version of these numbers. But as we dig deeper we see more.
As a result of correction of an error within export in insurance services, the impact is downward revisions to exports from 2009, with the largest annual revision of £6.5 billion in 2011.
So not only do we not know the banking sector we are rather vague about insurance too! Run me by again which are the important sectors for the UK economy again? Also maybe Mark Carney might have addressed such issues when giving his recent speech to the UK insurance industry, by this I mean the speech when he extended Forward Guidance to climate change.
There is something extraordinary in the section on this so let me quote it carefully.
due to the small number of operators in the precious metals clearing market, the data are highly confidential. As a result, we are unable to give more detail about the approach used and the associated revisions.
As there has arisen a lot of doubt in recent times about gold transactions this is worrying. Do not misunderstand me as there is a lot of paranoia about but we live in an era where the paranoid turn out to be realists and accurate all too often. Still it may not be a big deal.
The range of these revisions to the annual trade balance is between negative £5.0 billion and positive £3.0 billion.
Oh hang on it is a big deal and just to be clear this excludes central banks and reflects the role of the London Bullion Market which is the world’s main market. The change in recent times is that this has been shifted from our financial account to the trade figures. If Jon Stewart was right perhaps we could try an alchemy style link to our music industry.
People out there turnin’ music into gold
People out there turnin’ music into gold
Even the Stone Roses appeared to have a view.
I’m standing alone
You’re weighing the gold
I’m watching you sinking
How very ahead of their times, drugs and gold combined.
Gas Gas Gas
Things have not gone so well here either.
HMRC Trade Statistics have amended the data source used in the compilation of Natural Gas traded with non-EU partners. This revision only applies in this bulletin for 2014. Imports of gas have been revised upwards by approximately £2.2 billion in 2014. We will fully implement the change from 2011 onwards next year.
A one-off change for now but with the implication that more is to come.
An intriguing paragraph heading from the ONS as it appears to refer to an exhaustive search down the back of everybody’s sofa.
To account for under-coverage of the incomes accruing to small businesses and income concealed by businesses and households through the evasion of taxes, there has been an indirect effect on trade in services. Exports of services have been revised up by approximately £2.0 billion in the most recent years.
So numbers which by definition we do not actually know have got on their white charger and ridden to our rescue?
The Rotterdam Effect
I covered this on the 3rd of June 2013 when I was on Mindful Money and it covers the issue of re-exports. The OECD defines them thus.
Traditional measures of trade record gross flows of goods and services each and every time they cross borders. This ‘multiple counting’ of trade can, to some extent, overstate the importance of exports to GDP.
This is also known as the Rotterdam Effect because the Netherlands benefits from having a port which is a centre for European and world trade.
If we switch from Gross exports to value added then 36% of her exports in 2009 vanished into thin air,which has quite an impact on one’s view of her as an exporter.
Actually Belgium and a country which regularly pops up with dubious numbers Luxembourg should be grateful it is called The Rotterdam Effect.
Belgium may be grateful for the phrase Rotterdam effect as otherwise there might be an “Antwerp effect” as 35% of her gross exports vanish using a value added system……Luxembourg. Of its 2009 exports some 59% vanished if we move to measuring value added.
Now of course on a lower scale these numbers also affect the UK. Oh and it also affects the debate over Europe as trade flows within the European Union are to some extent double-counted at times.
The most likely assumption indicates that UK exports to EU countries account for somewhere between 46.1% and the currently published (for 2013) 50.4% of total UK exports, if the Rotterdam effect was considered. Similarly, UK imports from EU countries account for somewhere between 49.1% and the currently published 53.3% of total UK imports.
Quite large changes for the UK and it is only one if a large port.
I will keep this simple. In spite of the implied claims based on 300 years of data collection there are serious problems with the trade and current account numbers. These feed into the already flawed GDP numbers such that those who argue for fine tuning policies have the issue that they may and in fact are probably likely to be responding to the wrong numbers. Sometimes it takes decades for it to be put right and of course decades later we cannot be sure.