UK GDP is a case of The Good, The Bad and The Ugly

Today is an example of be careful what you wish for. No doubt the UK Office for National Statistics thought it would be clever to produce monthly GDP data. But now in addition to the usual problems they find them not only being scanned beyond their capabilities but for the unwary comparing them to the quarterly and annual ones creates quite a of confusion. Indeed we can go through them in Spaghetti Western style.

The Good

This comes from this part of the release where we how have had three months of economic growth in a row.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020 as lockdown measures continued to ease, following growth of 8.7% in June and 2.4% in May.

In terms of detail we are told this.

“Education grew strongly as some children returned to school, while pubs, campsites and hairdressers all saw notable improvements. Car sales exceeded pre-crisis levels for the first time with showrooms having a particularly busy time.

“All areas of manufacturing, particularly distillers and car makers, saw improvements, while housebuilding also continued to recover.”

The latter component will, of course,please the Bank of England. I have to confess a wry smile at the mention of distillers, have we been driven to drink? As to car sales this was reinforced elsewhere.

wholesale, retail and repair of motor vehicles subsector (in particular, the motor vehicles industry), which recovered to above its February 2020 level after seeing record low levels of output in April and May.

This is an area which was affected by the lockdown as when I took my car in for its MOT in August I was told that in April last year they had done 110 and this year 18. Another area which was similarly affected also boomed in July.

Monthly construction output increased by 17.6% in July 2020 compared with June 2020, rising to £11,922 million, because of growth in all construction sectors.

Then and slightly confusingly not directly linked to the GDP numbers ( which are output not expenditure ones) these will not be included.

The total trade surplus, excluding non-monetary gold and other precious metals, widened by £5.9 billion to £6.4 billion in the three months to July 2020, as imports fell by £8.5 billion and exports fell by a lesser £2.7 billion.

I point it out as it is rare for the UK to record a trade surplus which continues as we look for more perspective.

The total trade balance, excluding non-monetary gold and other precious metals, increased by £35.8 billion to a surplus of £3.7 billion in the 12 months to July 2020.

The Bad

Our perspective shifts as we switch to something approaching the more normal quarterly measure for GDP.

Gross domestic product (GDP) fell by 7.6% in the three months to July 2020 following two consecutive quarterly falls, as government restrictions on movement dramatically reduced economic activity.

In case you are wondering how we can grow for 3 individual months but shrink over the total it is because we are comparing the latter with the previous 3 months which include some pre pandemic data.

The Ugly

This comes if we directly compare with where we were or more strictly where we thought we were before the Covid-19 pandemic hit.

Monthly gross domestic product (GDP) grew by 6.6% in July 2020, following growth of 8.7% in June 2020. Despite this, the level of output did not fully recover from the record falls seen across March and April 2020 and was still 11.7% below the levels seen in February 2020,

So we have picked up but the peak is still a fair way ahead. Or if you prefer.

July 2020 GDP is now 18.6% higher than its April 2020 low. However, it remains 11.7% below the levels seen in February 2020,

There is a sub-plot to this which is unusual for the UK.

In July 2020, the Index of Services is 12.6% below February 2020, the last month of “normal” trading conditions prior to measures introduced as a result of the coronavirus (COVID-19) pandemic…..There was a rise of 6.1% in the Index of Services between June 2020 and July 2020.

The area which is normally a strength and pulls the numbers higher has in fact under performed. One feature of this is hardly a surprise although we can expect a pick-up from the “eat out to help out” policy when we get the August numbers.

Total services output decreased by 8.1% for the three months to July 2020, compared with the months to April 2020; this was led by accommodation and food service activities, which fell by 62.7%.

On the other side of the coin production has been helping in relative terms.

In July 2020, the Index of Production (IoP) was 7.0% below February 2020, the previous month of “normal” trading conditions, prior to the coronavirus (COVID-19) pandemic…..Production output rose by 5.2% between June and July 2020, with manufacturing providing the largest upward contribution, rising by 6.3%; there were also rises from electricity and gas (2.7%), water and waste (2.4%) and mining and quarrying (0.7%).

It was led by this.

The monthly increase of 6.3% in manufacturing output was led by transport equipment, which rose by 18.5%; all of the 13 subsectors displayed upward contributions.

However it had been in a weak spell anyway and then was hit hard so care is needed.

Comment

There are a lot of contexts and warnings required here many of which are driven by the unreliability of monthly GDP data. The unreliability will be worse right now due to the pandemic as we note something I was pretty much alone in reporting on August 12th.

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.

More was recorded as less which is a UK peculiarity and made our GDP numbers look worse by maybe 5% on the fall. But now we are seeing the other side of some of that as we note this from the July data.

The largest contribution to monthly growth is education, rising by 21.1%.

Now let me look at the mess which is health.

For example, the suspension of dental and ophthalmic activities (almost 6% of healthcare output), the cancellation and postponement of outpatient activities (13% of healthcare output), and elective procedures (19% of healthcare output) will likely weigh heavily on our activity figures.

If course for a spell Covid-19 treatment was booming well if we counted it.

 Further, our estimates may be affected by the suspension of some data collections by the NHS in England, which include patient volumes in critical care in England.

Oh and if you are struggling with quarterly numbers please run me by how you can get monthly GDP numbers?

For example, the quarterly activity estimates are only made available with a lag, necessitating a form of activity nowcasts.

That is a bit like the services monthly trade data which come mainly from a quarterly survey.

So we did not contract by as much as we thought and have not rebounded by quite as much either.

Looking ahead there are some further strengths for August as we have noted the potential rise in eating out and the Markit PMI reporting this.

A further surge in service sector business activity in August
adds to signs that the economy is enjoying a mini boom as
business re-opens after the lockdowns,

But the PMIs have been downgraded in importance quite a bit as time has passed. Looking further ahead there is this.

The UK has secured a free trade agreement with Japan, which is the UK’s first major trade deal as an independent trading nation, and will increase trade with Japan by an estimated £15.2 billion ( Sky News)

Oh and these things always promise more trade…..

Back to now whilst it was nice to have a bit of variety and be able to report a UK trade surplus it is also true it came from a bad route which is lower imports due to a weaker economy.