We should worry less about UK GDP variations and more about the methodology used

Today is the day we find out how well the UK did in the 3rd quarter of 2015 as the economic expansion continues. However there are immediately two issues the first of which is the assumption that GDP (Gross Domestic Product) numbers are a good guide to the economy which has more than a few problems. The second is the way that the UK feels it can produce reliable numbers only 27 days after the end of the quarter itself. Only China dashes to the publication post faster with the majority of economies taking more time and in the case of our near neighbour Ireland a lot more time. Although of course non official sources are able to release their suggestions when they like as the NIESR (National Institute for Economic and Social Research did on the 7th of this month.

Our monthly estimates of GDP suggest that output grew by 0.5 per cent in the three months ending in September after growth of 0.5 per cent in the three months ending in August 2015. This slight softening in the third quarter is expected to be temporary.

Ah temporary!

An optimistic slant on services output

These days this is the largest part of our economy as it edges ever nearer to becoming 4/5 ths of it. In fact as the current weight of 78.6% comes from 2012 it might already be true. This poses a lot of challenges and let me open with the simple measurement issues where Diane Coyle points out this.

Statistics always lag behind what is actually happening in the economy. Not only does it take time to gather and collate the data, it can also take many years to understand how to think about the economy at a time of major structural change, whether in the late 19th century or today.

Okay that seems a fair point and having suggested to the Bean Review of UK Economic Statistics that work should be done and more thought applied to our services data I agree. Diane continues on this theme below.

Increasingly, there is an awareness that GDP is not an entirely satisfactory measure, as it does not give policymakers an accurate picture of how the economy is changing. The economy that businesses and citizens are experiencing, driven by Big Data and  “software eating the world” is largely absent from official statistics.

Diane identifies what she sees as the 4 main problems with this.

There are in fact four significant problems with GDP: how to measure innovation; the explosion of free online services; the shift away from mass production to customization and variety; and the increase in specialization and extended production chains, especially across national borders.

If we take these forwards then if you are wondering about the suggested impact of the second of these let me show you.

At the optimistic end, one U.S. study estimated that free websites generated a consumer surplus for 2007-2011 equivalent to 0.75% of GDP a year, and a European study (using data up to 2011) estimated their benefit at 0.6% to 1% of GDP a year.

Whilst I think that there are problems with measuring our services output I begin to part company here as we find ourselves placing a value on something which is free. There are plenty of problems created by issues such as imputed rent where we impose prices we think we have an idea of but about  these we have very little. Imputed squared? Ironically we get nearest in the government sector as when I gave some technical advice to Pete Comley on his book on inflation he informed me that he could see very little pattern or logic in how the Government sector (inflation) deflator was calculated when he researched it. After all we could add in lots of other things which are free such as housework and gardening. This is before we have the issue that the advertising sector would double-count some of this.

In a way we find ourselves back to the recent improvements which also in my view were influenced be some double-counting of research and development.

with new definitions introduced in 2013 adding 3% to the size of the American economy overnight.

But as to the principle we need a rethink I completely agree but it will be one of swings and roundabouts not just swings! I am hopeful for areas such as Tech City around City Road in London as so many of the brightest and best from around Europe have gone there but I do not expect a “with one bound we are free” moment.

Today’s data

Firstly let me doff my cap to the NIESR who were right.

GDP is estimated to have increased by 0.5% in Quarter 3 (July to Sept) 2015 compared with growth of 0.7% in Quarter 2 (Apr to June) 2015.

Also we see yet again that according to the official records it is a service-sector world.

Services increased by 0.7%, contributing 0.59 percentage points to Quarter 3 (July to Sept) 2015 GDP growth

So they explained more than the growth we had and let me put in a cheer for mining & quarrying or essentially North Sea Oil and Gas up 2.4% (the rig maintenance cycle affected 2014) and agriculture up 0.5%. I have argued for some time that we could and should do better on the agriculture front. But that leaves us wondering about what fell? Well after the monthly updates I have noted regular readers will not be surprised by this.

In contrast, manufacturing decreased by 0.3% following a decrease of 0.5% in Quarter 2 (Apr to June) 2015.

At least I suppose the rate of fall dropped as we mull the issue of whether this is the higher value of the UK Pound £ finally having an impact.

Construction

Let me remind everyone that these numbers are at best troubled and I am unsure how they keep their National Statistics status.

There was a downward contribution (0.14 percentage points) from construction; this industry fell by 2.2%.

July and August were very poor followed by an improvement in September. Brian Green of Brickonomics looks closely at the numbers and he points out that the past suddenly got a lot better earlier this year.

it appears in March there was a reallocation of a major business from the services sector to construction…….

And my guess – it is only a guess – it that it means that from now on construction will be of more than of £1 billion and more like £2 billion bigger (probably more than 1% anyway), with nothing having changed in the real world.

In line with the theme of today you may note that the services sector had to have shrunk but of course it seems to just shrug that sort of thing off.

I think I will stick to counting cranes myself.

Comment

If we look at 2015 so far then a case can be made for arguing that we have had steady economic growth of around 0.5% per quarter as 0.5% follows 0.7% and 0.4%. Looked at like that the media spinning around today being 0.5% rather than the expected (by whom?) 0.6% is irrelevant. When this was discussed at the Royal Statistical Society a sigh went around the room as everyone realised this was a media treadmill we seem to be glued to. Putting it another way Chris Dillow has done the mathematics.

Average revision to 1st estimate of GDP growth has been 0.33pp Implies 2/3rds chance that Q3 growth was 0.17-0.83%

Aren’t you glad that’s clear!

But as I have discussed above there is much to consider about GDP numbers and the problems I have highlighted today add to the ones I have looked at in the past. In some areas such as technology I am optimistic so lets us hope for better however I think that it is too simplistic to  assume and then impute prices for things which are free. Although of course Luther Vandross and Janet Jackson did tell us that the best things in life are free and they had a point.

As to improving the numbers themselves then it is time to say yes to the Artic Monkeys.

Do I wanna know?

After all hidden away we see this.

Are there some aces up your sleeve?
Have you no idea that you’re in deep?….
How many secrets can you keep?

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20 thoughts on “We should worry less about UK GDP variations and more about the methodology used

    • Aldi are selling 4 pints of milk for £0.80.

      In fact,making a decent profit is getting harder.I recently purchased car tyres and bought online for the first time.Tyres that normally cost £120 were mine for £84.

      • Hi Guys

        I just wanted to add that agriculture has been doing better than I thought which I am pleased to report. It had dropped by 2.4% in the first quarter of this year meaning that 2015 has not been great year on year but in 2013 and 14 it did really well and is in fact 15.4% up on 2012. So in fact let me welcome our fastest growing sector since then…

  1. Hello Shaun,

    I agree GDP is a mess and theres no will to change it to reflect any semblance of reality

    Chocolate allowance has just been increased from 4 oz to 50 grams

    Forbin

  2. Diane Coyle raises some interesting points but I fear there’s a broader issue here in that the internet is applying a massive deflationary pressure that doesn’t seem to be reflected in the headline GDP figures.

    So many companies in the western world are driving profits higher via debt financed share buy backs that it’s hard to truly estimate whether we’re growing or not.I genuinely wonder where we’d be if ZIRP/HTB1+2/FLS etc were withdrawn.

    Also worth pointing out….again and again…..that with the Govt running a fiscal deficit of 5%+ of GDP,the headline figures aren’t exactly representative in the first place.

    As you say Shaun-and Forbin alludes too-the issue of imputed rents being 11%+ of GDP does beg a number of questions.Can you really include what people would have spent on renting the house they own as a national product?Why not count imputed taxi fares for trips you did in your own car?

    It would make far more sense to price our national debt-which is a nominal sum-of something else that’s a nominal sum eg tax receipts.

    The GDP figures are a joke and much like the inflation figures,not a reflection of every day reality for most people.

    • Hi Dutch

      If we look at taxes the situation looks bright as I discussed the other day as taxes on income and corporation tax were strong. Of course as they struggled for a while the past gets downgraded a bit. As to imputed rent then they need it to get the income version of GDP to add up. Or more specifically so it matches the expenditure and output numbers. Again that is only in theory as in practice they usually don’t although Nigel Lawson back in the day stopped people like me from looking at that in the UK.

      As to Imputed Rent the New Economics Foundation has calculated this.

      “Inclusion of how much home-owners would pay if they actually rented boosted UK GDP in 2014 by £158bn – a 8.9% share”

      I have just checked and it looks like £154 billion to me but I guess it has been revised and it is 11.8% of total household income.

      Oh and there have been some extraordinary revisions to some of the numbers so it will be an issue of watch this space a bit!

  3. Hi Shaun Thanks for some great blogs and coupled with some very interesting comments of late makes these pages a must read.
    As you state the media spinning around the expected 0.6%(by whom) is spot on.
    Your friend Chris Dillow did suggest 0.5% in the IC.As you both say the figure is likely to be revised.
    May have made the royalty( Carney) more uncertain ( if that’s possible) about when to raise or lower interest rate.

    • Hi Midge and thank you

      Mark Carney would not have known the data when he backtracked a little on past statements in The Mail on Sunday as he would have got the numbers at 9:30 am on Monday. However Nemat Shafik did a little bit of Bank of England redacting today.

      ” monetary policy makers in the US and UK will likely consider it appropriate to gradually tighten monetary policy should the recovery in their respective economies continue. ”

      likely….should they….

      Mind you she has been unimpressive so far…

  4. Shaun, counting cranes is probably as accurate as the figures bandied about! I spent many years establishing new businesses in developing countries that had either no statistics to work from or highly unreliable ones. As a result I developed a good ‘nose’ for sniffing out economic reality by observing and talking to businessmen, retailers and consumers. I have just been to various places in Spain and Portugal and the U.K and I can tell you that by comparison the UK is absolutely humming along. You can see the difference across all socio economic groups where the UK is materially much better off. Portugal is quite flat and going no where and although the Eurozone keeps talking up Spain it doesn’t appear that way ‘on the ground’. Every time I return to the UK I am struck by how busy and dinamic it’ appears compared to elsewhere in Europe. We always end up revising economic figures up and I suspect that these small downturns are just a statistical glitch. Like the double dip recession that wasn’t, I will bet that the year ends up better than currently forecasted.

    • The problem is that whilst the UK may be buzzing compared to Spain/Portugal,that could well be a reflection of how poor the situation is in those countries rather than how well the UK is doing.

      Is it translating into meaningful real wage gains in the UK?I’m not sure it is.

      It maybe a good time to make money in the UK but in reality,the businesses I’m seeing do well have the govt the other side of the trade,or are churning in the city.As Shaun points out,manufacturing is still shrinking.

      Indeed if we were able to accurately measure our population,I sincerely doubt we’d be looking at GDP per capita growth at all.

    • Hi Bob J and thanks

      Nice picture of Battersea Power Station these days the passer-by can only see it from the other side of the Thames. As to the article it all really depends on foreign money flows doesn’t it? Some look like they are slowing.

      This bit raised a smile though.

      “Sahil Mahtani argues that a combination of rising interest rates, ”

      What rising interest-rates are they?

  5. Shaun, as usual a very sane critique of the rushed out numbers. I agree with your points, the official commentators are very quick to claim a trend from very small increments, often in complete contradiction of what they said for the last numbers.

    Entertaining analogy that Coyle makes with economic change, looking at industrialisation and comparing to our “internet of free services” being difficult to value. I would like to re-position this UK economy as the confusion of consumerism based on low-prooductivity with ever higher debt leverage via fake asset pricing. If Diane likes to term that the “new economy” then I hope she is there to identify its obvious faults when it stops working.

    Pavlaki correctly sees the crazy busyiness of the the UK, but that is only because of 20% under-capacity in every infrastructure provision and rentier or price gouging for the unwary or victim punters. With proper transport and property provision there would be alot less exasperating inefficiency.

    I noticed an interesting FT article today, suggesting a potential run on sterling based on imbalances in investment income/liability and general over-leverage, Shaun can you have a go at that subject and do a better job of explaning it to me?

    Thanks and keep it up, Paul C.

    • Hi Paul C

      As to the investment income numbers they were revised downwards recently as we assumed that we got a lower rate of return than we has assumed before. There in essence is the point as we have yet another assumed number without really knowing. Also as one of the replies suggests is it partly driven by the rally in the UK Pound £ since March 2013?

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