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.
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.
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.
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.
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.
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?