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.