Has nobody else spotted 6% inflation being reported in UK GDP?

Today brings my home country the UK into focus as we get the first picture of how much economic damage the lockdown did in the second quarter of this year. So let us take a look.

UK gross domestic product (GDP) is estimated to have fallen by a record 20.4% in Quarter 2 (Apr to June) 2020, marking the second consecutive quarterly decline after it fell by 2.2% in Quarter 1 (Jan to Mar) 2020.

That was depending on who you looked at better than forecast, for example the CBI was suggesting a 25% drop yesterday with most suggesting 21-22%. I see the someone at the Financial Times will get first dibs on the best cake from the cake trolley today for presenting it like this.

Just in: The UK economy contracted 20.4% in the second quarter, a bigger slump than any other major European economy.

In itself the fall was no surprise as at a time like this we can certainly ignore the 0.4% as we wonder if it is even accurate to whole percentage points? Curiously for a number which is of the level of a depression and a great depression at that the media seem to be lost in a recession obsession.

BREAKING: UK is officially in #recession as the economy shrinks by a record 20.4% in the second quarter of the year. It’s the first time in 11 years that the UK has gone into recession. ( BBC)

Meanwhile back in the real world we were expecting a fall of the order of a fifth and we need to move on to see if and how we are recovering from the impact of the lockdown. After all we did close quite a bit of the economy.

There have been record quarterly falls in services, production and construction output in Quarter 2, which have been particularly prevalent in those industries that have been most exposed to government restrictions.

June

We see that there was indeed quite a bounce back as the economy slowly began to reopen.

Monthly gross domestic product (GDP) grew by 8.7% in June 2020, following growth of 2.4% in May 2020.

I am not sure whether we will ever fully pin it down as for example pubs and bars were allowed to reopen on July 4th but the ones I jogged past on the Battersea Power Station site had people sitting outside drinking some days before that. So officially after these numbers but unofficially?

Speaking of not being sure what was and what was not supposed to be happening the strongest growth came here.

Monthly construction output grew by a record 23.5% in June 2020, substantially higher than the previous record monthly growth of 7.6% in May 2020;

How much?

Monthly construction output increased by 23.5% in June 2020 compared with May 2020, rising to £10,140 million

Which areas?

The record 22.2% (£1,224 million) growth in new work in June 2020 was driven by increases in all new work sectors, with the largest contribution coming from a record 42.3% (£545 million) growth in private new housing.

The Bank of England will be happy to see the housing growth.

Next on the list was manufacturing.

Production output rose by 9.3% between May 2020 and June 2020, with manufacturing providing the largest upward contribution, rising by 11.0%, the largest increase since records began in January 1968.

Driven by.

The monthly increase of 11.0% in manufacturing output was led by transport equipment (52.6%) but this subsector remained 38.2% weaker compared to February 2020; of the 13 subsectors, 11 displayed upward contributions.

The issues with transport production began long before February of course.

Unusually for the UK its main sector was something of a laggard rather than being a leader in June.

There was a rise of 7.7% in the Index of Services between May 2020 and June 2020; of the 50 services industries, 47 grew between May and June 2020, though most remain substantially below their February 2020 level.

The detail provided reminds us that much of the debate about the decline of manufacturing ignores the reality that we have to some extent defined it away. As the repair of cars and bikes involves elements of manufacturing and services in my opinion.

The largest contribution to monthly growth was wholesale and retail trade and repair of motor vehicles and motorcycles, rising by 27.0%; of the 7.7% growth in services, 1.7 percentage points came from wholesale and retail trade and repair of motor vehicles and motorcycles.

We learn a little from looking at the best part of services and noting that even it has a way to go.

The rate of progress for each sector in returning to February 2020 levels can more easily be understood in Figure 8 where, for example, in June, wholesale and retail trade and repair of motor vehicles services was at 93.7% of the February 2020 level, rising from its lowest point between March and May of 65.2% of the February 2020 level.

Also I did say that the Bank of England would be happy and need to correct myself to say until it read the bit below.

In contrast, real estate activities have fallen for the fourth month because of real estate activities; and rentals and commercial property, excluding imputed rent.

For newer readers a fall in imputed rent is just too much for the establishment to cope with. So let’s leave them with their fantasy numbers and move on. Also I am not expecting a major bounce in the category below any time soon.

Head offices and management consultants have also fallen for the fourth consecutive month.

How much of a shift in economic life there will be remains uncertain but offices will be downsized overall and management structures will change.

We also get a reminder that we need to take care using percentages.

Wholesale, retail and repair of motor vehicles had the largest growth of 417.2% as car showrooms were open to the public in England from June 1 and elsewhere later in the month, replacing click and collect sales.

417% of not much is well I am sure you can all figure it out. Also I have emphasised the number that stands out below.

which reported that the average usage in June 2020 was 73% for all motor vehicles, 6% for National Rail and 75% for heavy goods vehicles.

As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue as we have been told by the establishment that public transport is the way forwards and yet it has hit the buffers. Has anyone checked on how this would affect HS2?

On a personal level this is one of the reasons why I have been using the Boris Bike system over the past few years. The standard of hygiene in London public transport is, well I think it is best we leave it there.

Comment

So we hope to have experienced the fastest depression in economic history but we do not know that yet. For example we looked at the monthly recovery (June) in manufacturing above but it is still only 86.4173% of the 2016 benchmark and yes I am smiling at the claimed accuracy. As to the recovery more is reported for July.

However, of those businesses currently trading, over half (54%) reported a decrease in turnover during this period compared with what is normally expected for July.

But still well below the previous trend.

Also I said earlier that the numbers might be out by 1% and now I think it might be by 5% so let me explain.

Nominal GDP fell by 15.4% in Quarter 2 2020, its largest quarterly contraction on record.

Okay so a 5% gap on the headline. How? Well there is a bit of an issue with the story we keep being told about there being no inflation.

The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020. This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.

Yep it is apparently now 6% and even 32.7% in one area.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up. Today’s figures support that view.

Podcast on the flaws with GDP

17 thoughts on “Has nobody else spotted 6% inflation being reported in UK GDP?

  1. Hello Shaun,

    re : “This notable increase occurred because the volume of government activity fell while at the same time government expenditure increased in nominal terms.”

    so its not just the poor old consumer getting the “shrinkflation” treatment.

    There should be an official health warning on all the figures from HMG in these “interesting times”

    Forbin

    • Hi Forbin and congratulations on you promotion.

      As ever I prefer the c*ck up theory to the conspiracy one. They have got themselves into quite a mess in reporting GDP in the government sector and have ended up reporting high inflation as a way out. Now whilst we have discussed on here areas which shut such as NHS dentists other areas were flying which is partly why we have borrowed so much.

      As you know I think inflation has been under reported but I mean around the economy not just in one area!

      • Since so many govts are acting in similar fashion, in order to believe in the “cock-up” theory, you’d have to believe that there are so many stupid people (people who also usually have degrees in the law or ppe & who gained them at their country’s finest universities) with so little common sense, being promoted to the highest echelons of govt. at the expense of so many abler, brighter people, that they both overwhelm & out-manoeuvre abler, brighter people to reach those highest echelons.
        I cannot believe that the stupid could overcome the clever so ubiquitously, & feel that the “cock-up” theory falls on this alone.
        When the stupidity of tptb dovetails nicely with their real agenda, rather than their stated one, that is more than enough proof for me, & I cannot see how anyone can intellectually reject that proof.
        Just inflation indices, & your futile struggle to have the nearer honest applied, should be enough proof of the duplicitous nature of govt. for you to realise that they are wicked, not stupid.
        Can you refute THAT?

        My view is that belief in the incompetence of govt. is akin to religious belief; unfounded wishful thinking.

  2. “As a child I recall the advertising campaign which told us “this is the age of the train”. well apparently not! This is an awkward conceptual issue”

    Well, it is, isn’t?

    I seem to remember there was some campaign about Young Person’s Railcards featuring ….. Gary Glitter

    No, thanks, mate, I’m fine.

  3. Great article as always Shaun.

    Not to worry about the recession. If we get 0.0000001% growth in the next QTR we will no longer be in reccession ;-)……

    Except we will. We’ve had Robert jenrick (I cant post what I really think of him) begging people to come back into the wasteland of central london. And today Rishi was pleading with people to start spending again.

    But who will spend? The 9m+ on furlough, the expected 3m+ unemployed? This is what happens when an economy based on consumer spending, stops consuming. The only way I can see it changing is if the gment continues to underpin spending. Time for a citizens income, not to fuel spending, but as humanitarian relief.

    • Uptick for the Jenprick comment.

      If rent/property/land was cheap then people would have plenty of cash to spend.

      Its estimated the Furlough scheme has cost £30 billion up until the end of July, which to put that into perspective is pretty much the same amount as the annual housing benefit bill. Wonder if the working masses would be up for cheap housing if they got a 3 month holiday every year.

      Strangest recession/depression though, when most are still getting paid, not sure what it can be called.

      • the phoney depression ?

        like the “phoney war” 1939-40?

        I expect to see some more “creativity ” ……..

        I honestly do not know what they will do , but I am sure they don’t know either!

        but they will have to do something……..

        forbin

        • Like it, “the phoney depression” could catch on.

          Has to be phoney as i’m off out with my daughter to eat Wagyu beef for the 2nd time in 3 days … if i can get a table that is.

    • Jenrick is too busy emulating Michael Green in bunging cash the way of Tory donors from avoiding contributions to the cost of public services to their rows of hutches.

  4. The train usage and construction data is an interesting pair.

    The Square mile is very dead at the moment and most of the eateries and takeouts are closed including the smaller M&Ses ( I assume that is the plural ).

    A lot of building work going on around what look like very empty builings. I wouldn’t want to own shares in WeWork right now. A lot of people are in no rush whatsover to get back to work in central London and, given many have childcare challanges and far less trains to get in on, I cannot see this changing anytime soon. I don’t see employers firing anyone if they continue to work remotely and refuse to come in either. As long as the productivity is high enough the grounds for dismissal are slim although payrises and bonuses are clearly out of the question. This issue of “why am I paying you London wages when you are living outside of London and never coming in?”, is another one. Also the risk of near shoring of jobs becomes higher. You need a native English speaker in the same timezone but why can’t they be in Newcastle, Preston, Belfast, Leeds or Exeter and be paid an awful lot less.

    Whitechapel station seems not to have really got anywhere in the last 6 months. A few more panels added on the ceiling and they’ve moved the train arrival boards to the centre of the platforms. Given this is a key Crossrail/Elizabeth line station it is clear that Crossrail is slipping further behind. Will it even be needed now? The latest published minutes for Crossrail on the TFL website make depressing reading. Productivity is an absolute joke. I saw London Bridge Station being rebuilt form the beginning to the end and it largely went to plan and you could see progress every week. We can do this sort of thing well when we want but the project management on the Elizabeth line is a shambles. HS2 is hardly likely to be better with so many of the same actors invovled.

    • Hi bootsy and thanks for the update on the City of London

      There are plenty of issues. In normal times I meet some friends for beer/wine in a bar just off Bishopgate. It would have been nice to do so on a night like tonight. But instead we have been having some chats via Zoom. So bar takings are down and my mug of coffee does little for GDP.

      Your report om Whitechapel station makes me think of all the years ( ~20) a tube station has been promised for Battersea. Now a couple if them are on their way but has their time passed? I had a look for progress and this made me laugh.

      “At the new Nine Elms station, the last of three portacabins have been removed to create more space to work in and a car park so construction workers can avoid using public transport.”

      https://www.ianvisits.co.uk/blog/2020/06/30/london-undergrounds-northern-line-extension-construction-restarting/

    • With the rice pudding index still standing at 75p, it is interesting to note the latest events at Zoopla. In the last few days, the take has shifted from down 5% to March and then down another 5% since March to prices having staged a recovery of 4% +/- 0.12% so falls over the year are marginal. Of course, many of the recent prices reported through the Land Registry relate to pre- April agreements working through, but I doubt this idea of a 4% rise. If you then look at their regional figures, every region bar London and marginally the North-east has actual prices £10-20k below the Zoopla estimate. Now I wonder which area has been most impacted by the SD holiday, especially over the £250-500k range?

  5. So, really what you are saying is that we have “created”;inflation of 3x the desired level, but that will not prompt a rate increase as used to be be standard policy. The reason for this sudden increase in inflation is the utter incompetence of a govt, which is doing less but costing more. Wouldn’t have anything to do with spending £250m on PPE from a company run by one of Cummings’s mates, which then subcontracted it back to a bidder asking £20m and siphoning the rest Offshore? Then, there was the transport contract to a company with no ferries and the Covid-tracing app that doesn’t work, but was placed with another mate of Cummings? Or maybe £500m pi55ed up the wall (sorry, invested) in a bankrupt satellite company which makes the wrong satellites for the new shiny U.K. satnav, which we paid £4m a year for?
    So, this is it then – vote for a bunch of clowns, which waste billions and do less to produce inflation, which is supposed to be the aim of the failed monetary policy. Then Sunak subsidises meals out for those paying so much for houses that they don’t otherwise have the cash for going out. Total madness.
    Meanwhile up here on the Borders railway, I contacted my Tory MP about the great run in I had one morning, when a train was delayed so much that it only left Gala 4 minutes ahead of the next scheduled service. We missed most stations except a busy one by a shopping centre and were in Edinburgh in 42 minutes instead of the usual 55 mins despite being out of schedule. I suggested that one train like this in each rush hour would make Gala attractive to commuters and bring people down here. It is not a problem getting the rolling stock down the other way as I often see double trains coming down. The response from Scotrail was that it was too much like hard work and wouldn’t happen – what’s the German? Oh, “Wir schaffen das”, but here it’s “that’ll do”. The clowns at Scotrail recently had a banner on the railings at Gala extolling Shawfair up the track on the basis that it is a new community (of Jenrick hutches) with quick links to Edinburgh. 🤦‍♂️

    • Hi Dave

      It is an odd story as the reality is that they have no real idea what the output is nor the level of inflation for the government sector. So why report inflation of 6.2% inflation in a quarter and 7.9% over a year. Maybe the numbers are kitchen-sinked so that the recovery will look better?

      As you know I think that inflation is higher than what is being reported but I mean all around the economy not 33% in one place.

      Scotrail has had a pretty hard day…..

  6. Pingback: How more accurate data help to explain the relatively large fall in UK GDP – Plain-speaking Economics

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