As Friday developed and we moved into the weekend it was clear that there had been quite a sea change in the reported performance of the UK economy. There are a whole litany of consequences from this as so much “expert” analysis is now today’s chip paper. I thought it was put well here.
I am a big fan of recent improvements but as
@ChrisGiles_ has flagged this AM the entire UK economic narrative – post pandemic – has just been revised away. Every “UK not back at pre-CV-19 level” headline now obsolete. “UK bottom of the G7” no longer true. Extraordinary. ( @shjfrench)
Of course well might Chris Giles be mulling such headlines as he wrote so many of them. But to be fair he also reported this news promptly which far from everyone did as for example I found myself chasing the BBC. Simon French also continued.
Now it is possible, as ONS note, that similar revisions will happen across G7 & UK is first out of the traps. But as macro guy who has had to talk to international investors why Gilts/ UK equities do/dont deserve a discount, this has cast huge doubt on recent investor conclusions.
Actually the US was first to do this and those who have followed my work on the measurement of GDP in health and education will know we had particular issues suggesting the UK was different.But there is a main point here and let us start with the scale of what David Bowie would call ch-ch-changes.
The GDP Numbers
We can start with the impact of the pandemic on GDP.
In 2020, average volume GDP is now estimated to have fallen by 10.4%, revised up by 0.6 percentage points.. This upward revision reflects both updated data and methods changes. Measurement of inventories is challenging over this time period; the changes in the inventories component is now estimated to have increased by £2.5bn in 2020 (previously this was a £11.4bn fall).
As you can see there has been a large change in inventories or rather the reporting of them. In the modern IT era we should surely know inventories
Next up is the rebound which was much more elastic than previously thought.
In 2021, average volume GDP is now estimated to have increased by 8.7%, revised up from a previous estimate of 7.6%
This is more of a step change because the initial fall in a recession is usually reduced over time albeit the 2020 was larger than usual but the rebound was much stronger than revisions usually show. So time for Marvin Gaye.
Oh, what’s going onWhat’s going onYa, what’s going onAh, what’s going on
The official version is below.
Alongside confronting the three approaches to measuring GDP for the first time through the supply and use table (SUT) framework, we have also incorporated richer data across a number of GDP components. For example, in the expenditure approach, household consumption sees upwards revisions in 2021 because of better information available on areas such as Telecoms.
There are two clear areas that I have highlighted over the years. Firstly the fact that you can gain extra information from the other 2 GDP measures as for example expenditure explicitly includes trade and income is often more timely. I realise many are taught at school and indeed university that net trade is in GDP when it is more complex than that. Secondly we looked at the Deflator and inflation issue in Telecoms where my argument that the price falls ( in that period were 90%) were both disinflationary and a boost to GDP. I rather suspect “better information” is in fact coming round to my point of view that these things can create economic growth.
What does this mean?
We are back to the destruction of so much expert analysis.
Upward revisions to annual volume GDP growth in 2020 and 2021 mean that GDP is now estimated to be 0.6% above pre-coronavirus (COVID-19) pandemic levels in Quarter 4 (Oct to Dec) 2021; previously this was estimated as 1.2% below.
For example here is something from someone who has talked the UK economy down.
“The fact that the UK recovered from the pandemic much faster than thought shows that once again those determined to talk down the British economy have been proved wrong,” said Chancellor Jeremy Hunt, ( Financial Times)
His whole budget strategy was based on that in another misfire for him. But I am thinking more of places like the Office for Budget Responsibility and the Bank of England. The productivity crisis and indeed the claimed labour supply issue just changed in terms of them being specific UK problems as their “expert” analysis supposedly showed.
It is hard not to have a wry smile at this bit from the Financial Times though. Have they forgotten that their stock view is that the UK will not grow ( or worse)?
That will add the equivalent of two years of current UK growth to the country’s gross domestic product.
The GDP Deflator
I have been arguing since August 2020 that there has been something big going on here and it has been UK specific.
For those new to the situation there was a warning as at a time when we were being told there was no inflation suddenly we had a recording of 6% which involved readings of over 30% in the areas in question. These were health and education and let me hand you over to last year’s Blue Book.
Movements in the implied GDP deflator in 2020 and 2021 have been largely affected by the government consumption deflator.
So they caught up to my point or rather were forced to admit it. Which meant this.
In 2020, the volume of government activity fell, for example, health and education in response to the coronavirus pandemic. At the same time, government expenditure increased in nominal terms……This led to a very large increase in the implied price of GDP in 2020, which then unwound in 2021 from this higher level.
We are back to the way you measure GDP as the UK switched to the output version for health and education rather than income. Then the pandemic hit which when dentistry stopped for example that meant UK GDP for this area was zero whereas elsewhere it changed little as state dentists were still paid. In essence the Deflator took the strain as our statisicians tried to recover reality. So I had a wry smile as I read this on Friday from them.
In 2020 the average gross domestic product (GDP) implied deflator growth is 5.1%, downwardly revised 0.8 percentage points. This is influenced by upward volume revisions in 2020.
There is less of an apparent influence in 2021 but you see if you take the view that something is embarrassing then the standard bureaucratic response is to obscure it. That thought was on my mind as I read this.
Blue Book 2023 will enhance the quality of deflators used by:
- introducing new methods to account for changes in the quality of computer hardware
- expanding the use of Services Producer Price Indices (SPPI) in National Accounts
- introducing new weighting methods for market output deflators
- introducing improved methods and data sources to estimate trade in services’ travel deflators
If say we were discussing a naval battle that would be quite an effective smokescreen wouldn’t it?
Comment
There are lots of contexts to this. Many of you have pointed out that the UK economy seems to be doing well in your experience and it now turns out that it is a case of anecdotes 1 official statistics 0. Next up is the issue of taking care with ch-ch-changes and as so often David Bowie was ahead of his time.
Ch-ch-changes
Where’s your shame?
You’ve left us up to our necks in it
Or as @BillWells_1 kindly pointed out.
@notayesmansecon Is exactly right to identify UK’s decision to use (just) the output GDP version for health & education. A caricature of effect of this decision is that you measure the number of operations and not include in GDP the ‘hotel services’ in hospitals.
Of course the corollary of my initial point is that we are in fact no better off simply that the official numbers reflect things better. There is an irony as they have done so just as things look to be turning down! But better late than never and there is one further important point which Simon French made. As a past bond trader let me point out that one of the reason’s UK bond yields rose relatively higher was our supposed economic under performance. That should now begin to unwind although remember the first human response to a big change is usually denial. Let me finish with another wry smile.
The revisions may also not have a big impact on public finances, since they do not alter official tax receipts or public spending data. ( Financial Times)
I guess the FT will not be using debt to GDP ratios any time soon which surely matter if you have been running stories about a fiscal “Black Hole”.
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