A curious treatment of inflation has knocked more than 3% off UK GDP

This morning has brought us up to date on the UK economy in the third quarter of this year. These days we get the numbers with a bit more of a delay than in the past and in this confused pandemic period our official statisticians must be grateful for it. It gives them more time to check matters and collect a fuller set of quarterly data.

Following two consecutive quarters of contraction, UK gross domestic product (GDP) is estimated to have grown by a record 15.5% in Quarter 3 (July to Sept) 2020. This is the largest quarterly expansion in the UK economy since Office for National Statistics (ONS) quarterly records began in 1955.

So we see quite a bounce back, but it is also true that momentum was lost.

The monthly path of GDP in Quarter 3 2020 reveals that there has been a slowdown of growth in August and September as momentum has eased through the quarter. GDP increased by 6.3% in July, driven by accommodation and food services as lockdown restrictions were eased.

That was the peak followed by this.

GDP grew by 2.2% in August, driven by accommodation and food services because of the combined impact of easing lockdown restrictions and the Eat Out to Help Out Scheme, as well as growth in the accommodation industry as international travel restrictions boosted domestic “staycations”.

Of course, there is a different perspective to the Eat Out to Help Out Scheme as we mull how much it contributed to the second wave of the Covid-19 pandemic and thus reduced GDP later on. Fortunately we continued to grow in September as some thought we might not.

In September, GDP further slowed to 1.1% where professional, scientific and technical activities had the largest contribution and legal activities, accounting and advertising saw strong growth after a muted August.

Actually September saw a swing back in something I drew attention to in the second quarter data where the UK statisticians treated education in a really rather odd way. From August 12th.

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.

That as I pointed out at the time was really quite bizarre and led to around 5% being subtracted from UK GDP. This time around they put some of it back as I note this in the September detail.

Education also had a large positive contribution in September as schools made further advances in returning to a level of teaching similar to before the lockdown started on 23 March 2020, primarily through increased attendance.

The state sector in GDP

This has long been a problem in GDP numbers which rely on prices and therefore hit trouble in areas where you do not have them.With much of UK education and health provision being state provided there is not a price mechanism and instead we see all sorts of often dubious assumptions. As a reminder I recall Pete Comley telling me that he had looked into the inflation measure for this sector ( called a deflator), when I provided some technical advice for his book on inflation  and felt they simply made the numbers up. Well in that vein remember the deflator which surged by 32.7%, well in Question of Sport style what happened next? We get a hint from the nominal data.

Nominal GDP increased by 12.6% in Quarter 3 2020, its largest quarterly expansion on record

So a 2.9% gap between it and the real GDP number with this causing it.

The implied deflator fell by 2.5% in the third quarter, the first quarterly decline since Quarter 4 (Oct to Dec) 2015. This primarily reflects movements in the implied price change of government consumption, which fell by 7.0% in Quarter 3 2020.

So we got a bit under a quarter of it back. The explanation would have been described by the Alan Parsons Project as Psychobabble.

This decrease occurred because the volume of government activity in the third quarter increased at a much greater rate than nominal government expenditure. This is partly because of the unwinding in some of the movements that occurred in the second quarter, which saw a fall in the volume of government activity at the same time as an increase in government expenditure in nominal terms.

This really is a bit of a dog’s dinner.

 In education, the large fall in the volume of education activity in the second quarter followed by the large increase in the third quarter help explain the most recent quarterly movement in the implied deflator.

The same happened to health.

In the third quarter, nominal spending on health was largely unchanged, while volumes increased, which has impacted upon the growth rate of the implied deflator in the third quarter.

Applying normal metrics to abnormal times has them singing along with Kylie Minogue.

I’m spinning around, move out of my way
I know you’re feeling me ’cause you like it like this
I’m breaking it down, I’m not the same
I know you’re feeling me ’cause you like it like this.

We can compare this with others to see the scale of what has happened here. We do not have numbers for the full Euro area but Germany for example saw its deflator rise by 0.5% in the second quarter and then returned to a slightly lower level in the third quarter. So very different. France saw more of a move with its deflator rising by 2.4% but has now reduced it to below the previous level. Spain saw barely any change at all

A Trade Surplus

The UK finds itself maybe not quite in unknown territory but along the way.

In the 12 months to September 2020, the total trade balance, excluding non-monetary gold and other precious metals, increased by £35.9 billion to a surplus of £5.2 billion.

Yes you did see the word surplus which is a rare beast for annual data for the UK and we can continue the theme.

The UK total trade surplus, excluding non-monetary gold and other precious metals, decreased £3.4 billion to £4.2 billion in Quarter 3 (July to Sept) 2020, as imports grew by £17.3 billion and exports grew by a lesser £13.8 billion.

However the theme does hit rougher water with the latest monthly data.

The total trade balance for September 2020, excluding non-monetary gold and other precious metals, decreased by £3.6 billion to a deficit of £0.6 billion; imports increased by £3.6 billion while exports remained flat.


The pandemic has created all sorts of issues but in terms of economics we find ourselves here, or rather this is where we were at the end of the third quarter.

the level of GDP in the UK is still 9.7% below where it was at the end of 2019. Compared with the same quarter a year ago, the UK economy fell by 9.6%.

In spite of the media obsession with recessions this is a depression and we should call it such. Looking ahead we know that things will be depressed by the four week lockdown we are presently in meaning the economy looks set to shrink again in this quarter. There are some newer official surveys for October which suggest we had lost more growth momentum as restrictions began again.

BICs for 5-18 October 2020, found that of businesses currently trading, 45% reported their turnover had decreased below what is normally expected for October, compared to 48% reporting decreases in September……While it is not clear exactly how strong a relationship there is between GDP and BICs, the business survey data suggests the outlook has improved only modestly, if at all, as we moved into October. ( @jathers_ONS )

However if we return to the overall pattern for 2020 we see that a decision by the Office for National Statistics has depressed the way it records UK GDP and that it is ongoing with less than a quarter being reversed. This makes international comparisons very difficult especially for those unaware of the situation. We need I think to add at least 3% to the UK number when we try to compare internationally.

On a statistical level I regularly find the ONS justifying things on the basis of “international standards” so it needs in my opinion to explain why it has taken such a different path this time.






23 thoughts on “A curious treatment of inflation has knocked more than 3% off UK GDP

  1. If govt. debt to GDP ratio is all that important, (not that I believe it is, with interest rates as they are)
    surely govts. must be prohibited from using (or at least c0unting) their own measures (eotho) to expand GDP?

    • Hi therrawbuzzin

      That is a good question, but I hear that sort of point rarely. I do not think that many look beyond the headlines and think about what is happening. With government’s expanding their role this looks like being a bigger issue in the future too.

  2. GDP calculations are going to be totally discredited along with inflation calculations(they are linked after all) so during covid, the manipulation has to be even more blatant to hide the horrible truths lurking beneath the surface.

    Mondelez recently reduced the size of the Cadbury Fudge bar by 14% to 22g to help tackle child obesity, how helpful of them, but curiously the price remained the same. Since the most expensive ingredient in the manufacture is cocoa, does anyone know how much it has gone up in price in the last fifty years? Surely given the massive increases in price of confectionery in this time it must be many times the price?
    Errr well no, actually in it was the same price $2435 in 1974.Well how about sugar? Surely that is vastly more expensive? Errr no again, it is now $14.75 – the same price as in 1973.Would anyone like to guess at the price of chocolate if central banks get their way and create the sort of inflation they want and commodities start to play catch up with say house prices???The mind boggles.

    • I’m afraid that is going to be very commonplace as companies look to increase margins and profit wherever they can. I used to work in fast moving consumer products and the pressure from the stock market for ever increasing profit was enormous. You launch a detergent with an expensive fragrance and then make the fragrance houses come up with cheaper close matches. packaging (which is often the most expensive component in a final product) is under constant review price wise and suppliers get squeezed. Usually quality / performance is sacrosanct but I have noticed that even there some of the big names are trimming costs and opting for products that are 95% as good as the original. The reality is that in most FMCG or food industries all the efficiency gains and obvious cost savings have been made so to boost profit they have to entertain ‘devious’ practices.
      Just look how big the centre tube of a toilet roll has become!

    • Stop hiding! Exactly on what basis did you give thumbs down? Do you disagree with the numbers? Or was it just that you didn’t like the suggestion that our/any government could be lying to you? Or ( god forbid) this site has its own ’77th’ operatives looking for subversive postings?

        • I posted a quote this morning from a BBC article where Rishi Sunak stated that the jobs available post-Covid would not be the same as pre-Covid.
          All I posted along with it was, “What does this mean?”
          My post loaded onto the page then disappeared, so I went back to the BBC website to find that quote & re-post it.
          The article was gone from the BBC web page too.
          I just had another look on the BBC for it, & still can’t find it!

          • Postings on an internet website disappearing? How about the next stage where people who deny or attack the covid/climate change/population replacement narrative disappear?

            Taken to detention centres(compare those to the gulags of soviet Russia) for vaccination or detained until they accept it, crazy? I’ve already pointed to the Australian authorities detaining anyone refusing a covid test, how difficult is the move to the next stage?

            How many times was the word “reset” mentioned in the video posted by Therrabuzzin yesterday?

      • Thumbs down based on previous posts I assume, people don’t like the truth when it conflicts with their own beliefs, when those beliefs become weaker and in fact disproved in the face of contradictory evidence they refuse to reject the incorrect beliefs and rather attack/hate the poster in order to cling on to those beliefs.Thus proving the power of the media to brainwash people to the point where they literally will defend to the limits of absurdity their belief that black is white.

  3. Hello Shaun,

    I think we’re supposed to take off 3% so thats a 12.7% shrinkage of GDP.

    To think they have under reported GDP is quite frankly unbeleivable , and if they have , why do they still have their jobs? in the private sector they would have been sacked long ago ( or promoted if we take the Barings point of veiw……;-) )


    • As the day has progressed the tone on a recovery has been more downbeat even the experts now saying the new vaccine will be too late to stem the current infections which were at their highest since May.

      The Guardian article today suggests the UK is sleepwalking into a debt crisis, its not the first time this has been mentioned the last few years but its ever more concerning now


      The Chancellor’s comments today hoping Joe Public will increase spending again may go on deaf ears, a fair percentage of the population is struggling quite badly and the rest may face higher taxation in due course restricting the same spending.

      Some councils are in deep financial trouble and the GOV may have to cut spending which will mean more job losses.

      I cannot see how the GOV are going to sort out in the next 12 months and sadly have to say I am quite pessimistic on the economy next year.

      There may indeed be an improvement on this year but I cannot see the economy recovering pre pandemic for some time to come, there has been too much damage to the economy there is no certainty at the moment and all the forecasts are bound to be inaccurate.

      A new way of working may indeed increase productivity but another article I read earlier suggested that working from home had not increased productivity. Lets face it no one can check properly what you are doing at home unless you are on the laptop all day and your history is checked. But if you are dealing with paperwork its a different matter.

      What I have noticed the last few days is builders profits boosted by recent home sales and this is part due to a shortage of properties, low interest rates and other GOV incentives.

      What should be done iimo is the GOV look at converting all the excess office space and retail premises quickly into private accommodation, but I guess they don’t want to act themselves thus upsetting large business.

      You cannot rely on private companies to do all this as they will find ways of protecting their profit margins. I have seen this with developments, the builders try and curtail lower priced property as they make less money on lower valued properties.

      The UK is in a deep hole at the moment and as for all todays claims the UK has missed a recession is a load of bullshi*.

  4. I looked at the figures this morning and nearly all the important data were worse than forecasts.

    The UK missed forecasts mom growth by 0.4%.

    Manufacturing production came in at a measly 0.2% MOM as again 1% forecast and with the £ now stronger there could be trouble ahead, more so with the second lockdown.

    The £ fallen against the $ after the data was published.

    The Pfizer affect is now wearing off and an interesting article from the SUN this morning pours quite a lot of cold water on any vaccine having a significant effect and nowhere near a 90% remedy:


    With a new president in the US and the coronavirus getting out of control in the US some states have already implemented new lockdowns.

    As for all the bullish comments about we are missing a recession this is all done to try and instil confidence in the gullible public so they don’t stop spending imo and I agree entirely what Shaun has said about the UK being in a depression. Next quarter figures will add to that thinking.

    Gilts fell after the data and we may yet be talking about negative rates in the UK yet again.

    • yah I read the virus articale but by March if the trend continues we will not need the vaccine except for the top 2 teirs …….andwe’re paying 38 billion for that .

      I’m not so sure that’s money well spent. 90/92% effective in the young is not reassuring , well not to me . Flu jabs are 15-45% effective and we give priority to the eldery for that ( as we should )

      If the majority of the population in the working age groups are not going to suffer much ( like flu ) then we should stop the lock ups and drop the masks ( I still cannot see any evidence in the covid figures that they have had any effect )

      we shall see


      • forbin

        Lets face it we don’t even know whether the vaccine will get regulatory approval and even if they do the roll out could be far slower than the GOV hopes.

        As for the cost of all this well the debate goes on and there are those who think we should let the virus take its own path and create heard immunity in due course and those who think it would cause havoc in our health service and cause even more damage to patients who need other care.

        The world health organisation seems to prefer trying to do whatever is possible through a lockdown.

        This is a dilemma worldwide but lets face it, it started in China and they went for strict lockdown and got ahead of the virus, things are almost normal now in China yet Europe, the UK stiff suffering badly and the US not doing at all well.

        But this is in part due to a dictatorship being far more able to deal with these situations better than a democracy, if they public don’t do as they are warned face far more stringent actions.

        However back to the economy and the latest GDP figures, the Chancellor given some interviews today with a cautious tone from my perspective but is hoping we will see some recovery next year once the “public start to spend again” !

        Start to spend again?

        With property prices sky high, and many workers having a cut in their wages and unemployment set to rise for some time to come, there is going to be a reduction in spending power.

        We need jobs and plenty of jobs with decent wages enough to pay for decent accommodation and unless the UK can find more jobs, and we export more and or produce more, things are going to be difficult for a long time to come.

        A lot of people forget the world was far too indebted and slowing down well before the pandemic began and many still think the world is due for a nasty correction even if the world gets on top of the pandemic.

        I don’t know what Gillian Tett the former UK FT editor thinks about the recent global crisis, she spotted the last financial crisis and believed there would have to be massive defaults in order to try and solve the indebtedness of the various counties debts. But the financial systems are moving in a completely different direction to that which she thought should be happening with QE and monetary easing.

        You cannot continue printing money forever there has to be a limit and its being done in the hope it can be repaid back in the future.

        There is now talk of increasing capital gains tax and in fact at least doubling this but I cannot see that making a dent in the GOV borrowings, not that I am against this as the biggest shoulders should take the biggest burden.

        In conclusion all I have heard thus far from politicians is a lot of hope but little in the way of substance in relation to boosting the economy with more jobs and ides about being far more productive.

        The furlough scheme has helped people from getting into serious financial straits but its only a temporary repair in a deflated tyre and not a permanent fix.

        • Interesting post.
          One small point about the herd immunity issue. Normally, this would be a solution, however painful to get there. For some reason, however (not known), the level of antibodies against the natural virus is low and falls away quickly (both exacerbated in the elderly). This leaves a vaccine as the way to deal with this, as the antibody levels are far higher than those created by the natural virus. How long the effect lasts, of course, no one knows.

          • If you look at the actual data of NHS hospitals in London you will discover that london reached herd immunity before end of May. At no time since has the number of covid related deaths in NHS London hospitals since that date exceeded 2 per million per day. This is a lot lower than normal for repiratory diseases for the time of year. london of course had a higher incidence of hospitalisation in the period up to the end of May. Its exactly the pattern you expect to see in a population obtaining herd immunity.
            The N West and N East are going through exactly the same process in October and early November, their numbers are now stabilised and slightly dropping.
            Anti-bodies stay in the body as required. The T-cell memory activates them again if they are needed. Low anti-body is actually a sign of the relative mild nature of the virus rather than anything else.

          • James: the reason anti-bodies count is low is because in so many cases it’s not getting as far as anti-bodies, memory t-cells are dealing with it.
            No antibodies does not equal no immunity; the memory t-cells still exist for the 2003 SARS outbreak amongst all those who contracted the now-extinct virus.
            17 YEARS IMMUNITY
            They are also immune to Covid 19.

    • Sorry for being pedantic, but there isn’t a new President in the US, not until mid-January. The media might like to think it rules the world, but it doesn’t, well at least not yet. There is a process and a timetable to be followed. Besides just being annoyed by media presumption and ‘narrative setting’ , I tend to think its important that written and unwritten constitutions are upheld wherever possible. They were designed to balance forces , ignoring them is part of a globalists agenda.

  5. Shaun, the ONS is not exactly covering itself with glory on the covid stats, so throwing a wobbler on the GDP deflator is not surprising. Unfortunately it seems to have joined the many who make mountains out of molehills. They take a relatively small sample and torture it to death with analysis, proclaiming all sorts of correlations etc ( very few are actually causations). We rejoiced that the hand held computer ( phone) had more chips/computing power than the largest old IBM machine. Load them all up with statistical packages that act like sausage machines, put in your sparse data and press the button and out flows great heaps of smouldering smelly ‘output’. And spread it round the world by pressing another button and everyone , especially those who want their own preferences reinforcing, sucks it up. Knowledge/data score ONE; Wisdom score ZERO.
    When I first visited this site after the ‘financial crisis’ of the late 2000s, it was great to share thoughts and banter with people trying to make sense of it all. And Shaun, your steadfast clear thinking was/is excellent. Now I must admit to being somewhat disheartened by the thumbs down against views that don’t match the current PC view of politics, economics and society. Everyone is entitled to their views, but there are a myriad of mainstream sites for people to use that have these views. I personally hope this blog continues its tradition of telling it like it is, and welcoming the views of those who feel sometimes ‘outside’ the mainstream.

    • “I personally hope this blog continues its tradition of telling it like it is,”

      here here on that , thumbs up done

    • But even here there are some people who essentially say that, if you don’t agree with them, you’re blinkered/a moron/ stupid.
      I have views on many things and, no doubt, some of them are disagreeable to others. However, I just wish that people simply showed me why I’m wrong or refuted my position with argument. What I find so hard is the ad hominem vocabulary. I feel that the greatest threat to our future is the inability to disagree and argue our position- it is so much easier to denigrate those with different views.
      Those who seek to shut down the opinions of others should reflect as to how they would feel were their opinions shut down.

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