UK GDP gets quite an upgrade meaning the “Outlier” analysis has collapsed

Today is rather hot with UK economic news and we can start with the fact that the turn of the year was better than previously reported.

• UK GDP is now estimated to have increased by 0.3% in Quarter 1 (Jan to Mar) 2023, revised up from a previous estimate of 0.1%, while growth across all quarters of 2022 is unrevised.

Looking into the detail we see that the Services sector was revised up by 0.2% as was construction. Actually there have been quite a few changes in the recent detail because whilst the second quarter remained at 0.2 there was a shift internally as Services growth fell to 0% and production rose to 1.2%. It is a sign there are a lot of changes going on and with growth low they are a relatively bigger deal. Also this is a really big change on what places like the Bank of England were saying as recently as last November.

As a result, the UK economy is expected to remain in recession throughout 2023 and 2024 H1,

In fact the UK economy has grown by 0.5% in the first half of 2023 which adds to their forecasting failures at the end of 2022.

Moving on we also have the Blue Book update for the post pandemic revisions.

But, combined with the better-than-thought pandemic rebound, the figures confirm that the UK’s economy now is larger than in earlier assumptions by around 2%, or £50 billion. ( Evening Standard)

By the way I am quoting the Evening Standard because at the time of writing our national broadcaster the BBC including its economics editor Faisal Islam seem to have missed the update. Anyway all the analysis about the UK under performing and being an outlier needs a revision as we shift from having GDP 0.2% lower than pre pandemic to the number below.

Taking into account all our recent revisions, this means that GDP is now estimated to be 1.8% above pre-coronavirus (COVID-19) pandemic levels in Quarter 2 (Apr to June) 2023.

Tucked away in the detail is an improvement for last year.

UK GDP is now estimated to have increased by 4.3% in 2022, revised from a first estimate of 4.1%. As announced in our previous Impact of Blue Book 2023 changes on gross

domestic product article on 1 September 2023, annual volume GDP growth in 2021 is revised up 1.1 percentage points to an 8.7% increase; this follows a revised 10.4% fall in 2020 (previously an 11.0% fall).

If we now try to bring things together the state of play is being reported like this.

The UK now surpasses France and Germany in economic growth since the pandemic, new figures show ( Bloomberg)

The problem with the league table type analysis is that it will change as others revise and update their numbers. Let me give you an example of Italy which I looked at yesterday and it has made major revisions. As we stand it gas done 0.3% better than the UK post Covid in GDP terms but looks to be weakening more than us in terms of a trajectory. I expect the “revision season” to see a relative improvement for the UK of between 0.5% and 1% of GDP due to our treatment of health and education output. So a bit under half of the reported change today is a relative change.

Looking Ahead

Whilst the news on the past is welcome partly because of the “doom and gloom” much of the media has indulged in ( for example Bloomberg are calling a 2% upgrade to UK GDP “slightly stronger” as I wonder what they would call a 2% fall?). What we need to move onto is the future and the monetary data does give us insights into this.

Net borrowing of mortgage debt by individuals saw an increase from £0.2 billion in July to £1.2 billion in August. This was the fourth consecutive monthly increase in mortgage borrowing and the highest since January 2023. Gross lending rose from £19.1 billion in July to £19.7 billion in August, while gross repayments were little changed at £18.9 billion in August.

So if we start with the central bankers favourite which is the housing market it is surprisingly strong as I recall they made a lot of effort to get numbers like this back in 2012 and 13. The surprisingly strong feeling is reinforced by this reality.

The ‘effective’ interest rate – the actual interest paid – on newly drawn mortgages rose by 16 basis points to 4.82% in August. Similarly, the rate on the outstanding stock of mortgages saw a 9 basis point increase, from 2.97% in July to 3.06% in August.

I think it has been so long since we saw a rise in mortgage rates like this that it is taking time for people to respond partly I think because rates were so low before. But if we look at the leading indicator here things are changing.

Net approvals (that is, approvals net of cancellations) for house purchases, which is an indicator of future borrowing, fell from 49,500 in July to 45,400 in August, the lowest level in six months.

Pre pandemic we had got used to numbers of 60,000 plus.

Money Supply

The release tells us this from UK broad money.

The net flow of sterling money (known as M4ex) fell to -£8.1 billion in August, from -£1.9 billion in the previous month. This was largely driven by a decline in the net flows of non-intermediate other financial corporations’ (NIOFCs’) holdings of money to -£6.6 billion in August, compared to -£3.3 billion in July.

As you can see there is a monthly fall which means we now also have an annual fall of 0.6%. The monthly numbers are erratic but if we simply add the last three months we have a fall of 0.6% so the Bank of England is applying quite a squeeze here with its interest-rate increases to 5.25% and its sales of UK bonds.

Indeed we can link this back to the mortgage rates section because whilst the relative UK economic performance recently has led to us being less of an outlier in bond yield terms as we have been noting the US and elsewhere have gone higher. Overall UK mortgage rates look set to remain high but with the two-year yield below 5% we may see more of this.

The average rate on a five-year fixed mortgage has fallen below 6% for the first time since early July, new figures show.

On Thursday, the typical rate dropped to 5.99%, according to the financial information service Moneyfacts. ( BBC )

Returning to the money supply issue it looks ever more that the Bank of England in its rush to look macho after its “Transitory” inflation debacle is now overtightening. Also it is selling bonds into a bond market panic and it is hard to over state how stupid I think that is.If you look back I did warn about this scenario ( as in their plans were predictably flawed.

Comment

So we see that all the analysis about the UK being an economic outlier can be thrown in the bin. Some have a lot of deleting to do or more likely simply denial as I heard Bloomberg TV call a 2% increase “slightly stronger” earlier. There is a serious point as the Bank of England, OBR, IFS and Resolution Foundation have piled this stuff on and now it no longer exists. That does matter at a time when the most likely next government is giving them a vote of confidence.

Britain’s economic institutions were created to provide stability. Under my watch they will never be undermined. ( @RachelReevesMP)

There is an irony in that we do of course have plenty of problems as whilst the new numbers make us relatively better the issue of disappointing growth continues. But there is an large elephant in the room here because it is the US with its fracking and the like which has done the best so far in this energy crisis and it is “renewables” Germany which has done the worst.

Looking ahead the money supply numbers suggest the Bank of England mat get the recession it has been so keen on so let me leave you with The Streets.

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?

 

What caused the large upwards GDP revision for the UK?

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 on
What’s going on
Ya, what’s going on
Ah, 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.

https://notayesmanseconomics.wordpress.com/2020/08/12/has-nobody-else-spotted-6-inflation-being-reported-in-uk-gdp/

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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