Good News for UK GDP, Productivity and Inflation

Yesterday brought some news which was both intriguing and welcome. It brings into play several of my themes. We have people being both inventive and innovative. Proper research into the consequences of this. Next we have something which I have to confess raises a smile which is economic growth being provided by lower prices. Yes the “DEFLATION” which regularly screams from the pages of the mainstream media as some sort of horror story. Last and definitely least is the way that the UK statistics establishment initially reviewed the work and decided as we often see with Imputed Rent that however the facts change we end up with the same answer as before.

The Telecoms Sector

There had been a longstanding problem here which is summarised below by Diane Coyle.

In the 2017 ESCoE Discussion Paper ‘A Comparison of Approaches to Deflating Telecoms Services Output‘ we explored why the official price index for telecoms had been almost flat during a period when the industry had experienced significant technological change including the advent of broadband data services, and business models, pricing and consumer behaviour also changing substantially.

Pretty much everyone will have seen extraordinary changes and innovation in the telecoms sector over recent years and indeed decades. As someone who paid for AOL Silver with its speed of 125k and then 256k if I remember rightly and now can do Zoom classes in the back garden from the Wi-Fi there has been extraordinary change. The price is about £10 per month more but that is dwarfed enormously by the quantity change. Recording that as unchanged is really rather extraordinary but sadly not unique as for example the way prices are used in the government sector are also often reality free.

Here is the problem.

While data services now represent the primary output of the telecommunications services sector, the existing output deflator used in the UK and elsewhere gives higher weight to traditional voice and text (SMS) services.

Next comes the consequence of the mistake.

Because the price of these traditional services is higher and demonstrated less change, using a deflator weighted towards these items implies slower growth in the real-terms output and productivity of the sector, which seems at odds with the considerable usage growth and experience of service improvements and motivated the consideration of alternatives.

This is an important conceptual issue so let me explain it. Our statisticians get data but it needs a Deflator to allow for any inflation so that we get a real number. When you enquire as to how this works they are often rather evasive. The issue here is that as David Bowie would put it there have been ch-ch-changes but these have not been allowed for. As you can see it is a big deal.

Because, although the component services from text messages and voice calls to WhatsApp messages and video all involve different charges (higher per byte for the ‘traditional’ services), they all use bytes of data carried over the same networks. These two options suggested a price decline of between 37% and 97% over the years 2010 to 2017, rather than the roughly zero change in the published index.

Moving On

One area of the newer work strikes home with me as someone who chooses the internet provider I have because they offered another attractive deal ( Sky Sports). Others might get a mobile deal but the point is as below.

For instance, fixed line services involve an access charge, currently treated as a separate charge when it would be more reasonable to allocate it across the services provided, as no-one just buys ‘access’. Bundling services has become common: Ofcom has estimated that nearly four fifths of services in the UK are ‘bundles’ of different components.

Many of you will be pleased to read that conventional hedonics have been rejected here.

For instance, many hedonic regressions for broadband use download and upload speeds as the main quality characteristics. However, these regressions rely on the high level tariff, rather than individual contract level data. This means using advertised, rather than actual, speeds since actual speeds can only be observed at the individual contract level.

I am sure I am not the only one who has contacted his provider over internet speeds during this pandemic. Also other factors matter and and led me add reliability which seems to have been missed.

other factors are also important such as coverage and latency (the time-lag between sending and receiving, of little importance on a text or local call, potentially awkward on an international call, potentially catastrophic for a high frequency traders).

In terms of the effect the results have been refined down to this.

Using our preferred option, which may still be characterised by some upward
bias, the price of telecommunication services in the UK declined by 64% from 2010-2017, rather than
remaining broadly flat as suggested by the current deflator. …….. Our new options deliver declines in the deflator series of between 58% and 84% between 2010 and 2017.

Comment

There has been a lot discussed here but many of you will be familiar as I covered this when it first appeared.

The analysis in the paper referred too highlights this in one simple section which shows that in the period in question telecoms revenues fell by 10% which in essence led to the falling output and productivity conclusion in UK GDP. But data transmission rose by a factor of ten strongly challenging the falling output conclusion. Another way of looking at that is the existence of a wide range of business and services such as WhatsApp or Kik. ( January 18th 2018)

Let me ram home the productivity point.

Telecoms accounts for only 1.8 per cent of the economy but official data suggest it is responsible for nearly a fifth of the economy-wide productivity slowdown. ( Financial Times)

Both the Financial Times and the Bank of England have been hot on the case of the UK Productivity Gap whereas regular readers will know that I have been more optimistic. The numbers are heading my way. Also both are inflation nutters who will be trying to avoid the intellectual disaster of economic growth coming from lower prices as I regularly argue.Where’s your 2% inflation target now?

Another reason I welcome this is that some of these matters are genuinely difficult as Diane Coyle points out.

The question is how to adequately control for quality change when there is a new or higher quality product, rapid volume growth and declining price substitute for an existing good or service.

It has applied to telecoms but goes much wider.

However, the key point is to be aware of the sensitivity of the price index to the assumptions made about weights.

It applies to fashion clothing and computer games as followers of my work will be aware. These factors have been drivers in the official propaganda campaign against the Retail Price Index yet could be reformed. Somehow that gets “forgotten” as I remind your that owner-occupied housing has a weight of 17% using rents but more like 7% using house prices. I am not sure manipulation could be more transparent.

As a matter of opinion whilst I welcome this work I would apply the lower gains as there are challenges to it. For example I recall the statistician Simon Briscoe pointing out that each I-Pad he buys is much better than the previous one but he only uses some of the gains. But we will be left with higher GDP and productivity and lower inflation. The latter is awkward as it  is not revised so we should calculate a new series so the difference can be known,

Finally let me return to the establishment initially rejecting this as some of you may follow social media and note this seemed to be officially denied. Perhaps they have “forgotten” this official letter from January 2018.

As the piece notes, while this improvement may change the relative size of the telecoms industry within our statistics, it will likely have little or no impact on our overall estimate of GDP.

In addition, there is also no direct read across to consumer price indices such as CPI or CPIH, as these indices are produced separately from national accounts deflators of ‘factory gate prices’.

Whereas yesterday we were told.

The effect of the new deflator would increase the volume of output of the telecommunications sector and will likely increase the headline volume measure of GDP.

 

Where next for UK house prices?

Today has brought a flurry of information on the state of play in the UK housing market as we wait to see how the slow sown in house price growth is developing. We start by noting that according to the official series things may have changed a little.

Average house prices in the UK increased by 1.3% in the year to August 2019, up from 0.8% in July 2019 (Figure 1) but remain below the increases seen this time last year. Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

As someone who welcomes the fact that UK wage growth is now well above house price growth it is a shame that house price growth picked up. But we do at least have wages growth around 2% higher than house prices. That will take quite some time to fix the imbalances bit at least they are not still growing.Indeed the place where things are worst on the affordability front is improving faster than that.

he lowest annual growth was in London, where prices fell by 1.4% over the year to August 2019, followed by the South East where prices fell by 0.6% over the year.

This weekend has seen a swing in both directions from the Financial Times. First there is a switch to Paris.

Why London’s bankers cannot resist Paris property

Then er perhaps not.

David Livingstone, the new head of Citigroup in Europe, said the City of London will remain the region’s top financial centre regardless of the outcome of Brexit.

For balance here is the other side of the coin.

House price growth in Wales increased by 4.5% in the year to August 2019, up from 3.8% in July 2019, with the average house price at £168,000.

Rightmove

They have joined the fray this morning via Reuters.

Asking prices for British houses put on sale in October showed the smallest seasonal increase since the financial crisis, as all but the most determined sellers waited for greater certainty over Brexit, industry figures showed on Monday.

Rightmove said that the average asking price for homes sold via its website was 0.6% higher in October than in September, well below the average 1.6% rise seen for the time of year and the smallest increase since October 2008.

Reuters seemed a little less keen on this bit.

Average asking prices in October were 0.2% lower than in October 2018, compared with an annual rise of 0.2% in September.

Views differ on the 2016 referendum but personally I welcome this consequence.

Britain’s housing market has slowed since June 2016’s referendum on leaving the European Union, and official data last week – based on completed sales – showed annual house price growth of 1.3% in the year to August, up from a near seven-year low of 0.8% in July.

LSL Acadata

LSL operate rather a different system to the asking price driven Rightmove and in fact Rightmove’s methodology seems to have taken a further downgrade according to Henry Pryor.

“..average asking price for UK homes sold..” I think it’s for homes listed, it includes the 50% of homes that don’t sell.

LSL however use this.

The LSL/Acadata house price index provides the “average of all prices paid for houses”, including those made
with cash.

As to the detail there is this.

Although average house prices in England and Wales climbed by a marginal £113 in the month of September, this was not a sufficiently large increase to avert a further decline in prices over the last twelve months, with the average annual price over this period falling by some -£1,100, or -0.4%. This was the eighth month in this calendar year in which the annual rate of growth has been negative.

In terms of a trend their accompanying chart shows that UK house price growth was of the order of 9% as 2016 began and has been heading lower ever since. So it was heading lower before the Brexit vote partly because if I recall correctly some tax changes for landlords which inflated things then deflated them.

As to the situation regarding real movements I am afraid that LSL then dig a hole for themselves. You can ( and I often do..) argue that the imputed rent driven CPIH is a woeful measure anyway but surely one should use wage growth here.

if we exclude London and the South East from our national statistics, price growth in England & Wales has remained positive over the last twelve months, albeit at a diminishing rate, such that by the end of September the rate of growth was a flat 0.0%……..It is currently only Wales where house price growth is ahead of CPIH. So we have marginal nominal gains alongside real terms falls, although of course the picture varies by type and area.

They have a go are torturing the numbers in a way that makes me wonder if they want a career at the Bank of England but they end up with all areas seeing real wage gains. Even Wales has some real wage growth relative to house prices.

London

As a Londoner I have to confess I am intrigued by the intra-London swings although the explanation below is a worrying one for the methodology used by LSL.

Unsurprisingly, it is East London where the largest rise in average prices in August for both the month itself and the
previous twelve months has been recorded, with Hackney up by 5.1% and 13.4% respectively. The reason for this gain
in prices is the launch of a new-build apartment block, known as the Atlas Building, comprising some 302 flats at 145 City Road, Hackney, close to Old Street Station. 67 of these apartments have been recorded by the Land Registry as having been sold in June and July to date, with prices ranging from £500k to £1.7 million. Given that this project
involves 302 new-build flats, we can anticipate that Hackney will continue to be at the top of the price-growth tables for several more months to come.

I would have hoped to have some quality measure or at least some form of allowing for the fact the new build sales are different to sales of existing houses or flats. Those selling an existing property in Hackney seem set to get a shock if they base their calculations on the LSL series.

Meanwhile on the other side of the coin.

At the other end of the scale, the borough with the largest fall in average values over the last twelve months is the
City of London, at -28.6%, but because few transactions take place there, its price movements are always quite
volatile, especially when expressed in percentage terms.

Also whilst we are looking at methodology we see that the average price overall has just dipped below £300k as opposed to the £235k of the official series.

Comment

It is easy to forget that there is much in the UK economy that is still house price growth friendly. For example mortgage rates remain very low driven by a 0.75% Bank Rate and a 0.53% five-year UK Gilt yield helping to keep fixed-rate mortgages at a low level. It seems the TSB wanted to join the party as of Friday.

TSB has made a series of changes to its mortgage range, featuring cuts of up to 1.30 per cent.

The biggest cuts can be found in the lender’s remortgage 10-year fix suite, with the 85 – 90 per cent LTV rate being chopped from 4.29 per cent to 2.99 per cent. This also asks for no fees and comes with free legals. ( Mortgage Strategy )

To this we can add the positive situation regarding real wages we noted above.

Foreign buyers may have been dipping into the market to take advantage of the lower value of the UK Pound. However things have changed there recently as 141 Yen and 1.28 versus the Swiss Franc replace the levels I noted on the 27th of August.

For example as markets opened yesterday the Yen went to higher levels than the “flash rally” ones I noted on the 3rd of January and at 130 Yen London property looks a fair bit cheaper. You could say the same about 1.20 versus the Swiss Franc.

Help To Buy shared ownership is still in play and has helped one of my friends and conveyancing delays permitting is about to help another.

The problem for house price bulls is that the measures above ( with the exception of real wage growth) were what was required to get UK house prices up to these levels, not to drive them higher. Real wage growth will take another year or two to have a significant impact. So unless we see a new move by the Bank of England or the UK government we seem set for real falls in house prices ( versus wages) and maybe nominal ones too.

Podcast

 

 

 

 

 

 

Today has seen a shocking decision on the Retail Prices Index or RPI

This morning the Chancellor of the Exchequer has announced his plans for the Retail Price Index or RPI. This is an issue close to my heart and something I have put a lot of time and effort into since its future became the subject of doubt in 2012. The moment we were told on Monday that today was the day I feared the worst along the lines of the saying “a good day to bury bad news”. With the Chancellor’s Budget Statement and the ongoing debate in Parliament over Brexit today has proven to be a day that the UK deep state thinks it can get away with something it has been angling for since 2012.

In essence HM Treasury has wanted to scrap the RPI because it is expensive in terms of the interest paid on UK index linked Gilts and for various pensions. Of course those making such decisions often benefit from RPI linked pensions it is for others and particularly younger readers that they want it to go. The last 7 years have seen various methodological efforts mostly around the formula effect but they have found themselves up against opponents like me and their cases have foundered and sunk.

Housing Costs

This is another area where up until today the HM Treasury effort had mimicked the Titanic. If we go back to 2002/03 the UK introduced a main measure of inflation that excluded owner occupied housing costs called CPI. Why? Well in a familiar theme it is cheaper for the Treasury as it gives a lower reading than the RPI, and more subtly when it is put in the GDP numbers it gives a higher reading ( averaging about 0,23%).

Next they though they could do better and find a way of measuring housing costs and further reduce the inflation number. That hit the barrier that house prices are soaring so instead of real numbers they decided to make some up. This is the Rental Equivalence system where they assume home owners pay rent to themselves when they do not. Rental Equivalence is the inflation version of Imputed Rents. In the UK the measure based on this is called CPIH and partly due to my efforts has been widely ignored.

House of Lords

The Economic Affairs Committee published a report in January after taking evidence from various sources including me and here is an example.

The Deputy National Statistician, Jonathan Athow, said that the lack of a measure of owner-occupier housing costs in CPI was its “major weakness”. Shaun Richards, an independent adviser to pension and investment funds, said that “if there is something untenable in my opinion it is a measure of inflation which completely ignores a very important sector which is owner-occupied housing.

In their report they then went on to reject the Rental Equivalence methodology of CPIH.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs. The UK Statistics Authority, together with its stakeholder and technical advisory panels and a consultation of a wide range of interested parties, should agree on the best method for capturing owner-occupier housing costs in a consumer price index.

Over to the UK Statistics Authority

Here is their response to this.

In light of the 10 years of development and consultation, ONS are not minded to undertake any further engagement with users and experts specifically on rental equivalence and owner-occupier housing costs. There is never likely to be agreement on a single approach.

As no doubt many of you have spotted that is shifting the goalposts as the EAC from the House of Lords had rejected an approach. Why are they shifting the goalposts? Well they are back with the rejected approach.

ONS views rental equivalence as the correct approach conceptually for an economic measure of inflation, and one where sufficient data is available to make it practical. Of
course, they remain committed to ongoing monitoring and development of the CPIH and the Household Cost Indices.

Here is the crux of the matter. They have made a decision and regardless of the objections and argument they keep making the same decision. They lose the debate but come back again.Over time I have rallied support at the Royal Statistical Society ( which in another “accident” of timing is in a conference this morning and cannot reply) and as you can see above the House of Lords. So it leaves me mulling this from Hotel California.

And in the master’s chambers,
They gathered for the feast
They stab it with their steely knives,
But they just can’t kill the beast

Another problem with Rental Equivalence

Tucked away in the House of Lords report was something of a bombshell.

 We note that the private rental market is subject to its own distortions and may not provide a good proxy for owner-occupier housing costs.

The fantasy structure of Rental Equivalence relies on good data from ordinary rents. Just for clarity I have no problem at all with the concept of using rents for those who do. But there are two catches. They are hinted at in the quote above and let me specify them. There are doubts that the properties which are let are that similar to those which are owned. But more fundamentally I have seen experts post concerns that due to the mixture of new and old rents being incorrect in the survey used the number is up to 1% too low. Since it claims currently rental inflation is of the order of 1% that is quite an issue!

Research

This is something we are regularly denied as for example work was done around 2012 around the Formula Effect but has never been published. I and others are of the opinion that fashion clothing and more recently computer game pricing are factors here. Today is not for the detail but I wrote to both the EAC and the Treasury Select Committee on this subject on February 26th as follows.

My understanding of this which I have checked with others is that the exact impact of the change is unknown because the Office for National Statistics suspended its investigation into this back in 2012. Perhaps one day it will properly explain why it did this but for now the main issue is that we do not know the precise impact until the proper research is completed and peer reviewed. I am sorry to have to point out that your letter is therefore potentially materially misleading and has already had a market impact on the price of index-linked Gilts.

This is a familiar theme where there are claims of research but when you ask for it then it does not appear. If I ever get a reply to that letter I will let you know.

I had other concerns but I am here just establishing a principle.

Comment

There are various conceptual issues here of which the simplest is that over the past 7 years the UK statistical authorities have pursued a campaign which has been one of propaganda rather than argument. We have done much better here as those of you who have followed the replies of Andrew Baldwin will know. He has made the case for the RPIJ measure which revealingly was first promoted but then abandoned by the UK statistical establishment when it did not give them what they wanted. Their behaviour was similar to a spoilt child taking their football home with them.

On a conceptual level the statistician Simon Briscoe has covered it well I think.

The details of the opportunities missed are in the table below but with ONS producing sub-standard documents like the infamous “shortcomings” paper, OSR failing (I think ever) to criticise anything that ONS has done on RPI, and the UKSA board not even trying to sort anything out (and being subservient to the Treasury), there is little hope.

https://simonbriscoeblog.wordpress.com/2019/09/03/how-poor-governance-led-to-the-problems-with-the-rpi/

The OSR is the Office for Statistics Regulation to which I gave evidence and I would say they ignored it but for the fact I believe it went straight over their heads.

Let me also address why the Bank of England supports this. Their main game is to inflate house prices. So if you keep house prices out of the inflation measure it is all growth or from their perspective jam today. First-time buyers or those trading up face inflation and face in many cases unaffordable properties yet according to the inflation numbers they are better off!

But there is a glimmer of good news. I suspect that the Chancellor Sajid Javid thought he would kick this particular can onto somebody else’s watch.

Today the Chancellor has announced his intention to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

I intend to continue to fight on as the establishment view has crumbled so many times before. There is hope around the Household Cost Indices mentioned above although they are a good idea which the establishment are trying to neuter ( You will not be surprised that it is in the areas of housing costs and student loans). So let me leave you with the Fab Four.

The long and winding road
That leads to your door
Will never disappear
I’ve seen that road before
It always leads me here
Lead me to you door

 

UK Statistics are in quite a mess as the Public Finances highlight

Today we complete a week filled with UK economic data with the public finances and so far it has been a good week. Before we get to it there has been news about the state of UK statistics from the Public Affairs Committee or PAC of the House of Commons. As a major part of this has been the ongoing shambles over the Retail Price Index or RPI and I gave evidence to the PAC on this issue. So what do they think?

There has been much criticism of the position that UKSA ( UK Statistics Authority) has taken at many stages during the last nine years and the position is not resolved. The Economic Affairs Committee of the House of Lords was critical of UKSA’s failure to correct errors in RPI, stating that, “In publishing an index which it admits is flawed but refuses to fix, the Authority could be accused of failing in its statutory duties.” Evidence to this inquiry from the RPI CPI User Group was similarly critical, stating: “It is a measure of the UKSA failure as an independent regulator that such an inquiry was necessary in the first place and produced such a damning report.

It seems that much of my message has got through.

Concerns have been raised about the Treasury and the Bank of England’s influence over UKSA regarding inflation measures.

That’s polite for they dictate them. Also the designation merry-go-round has been a farce.

UKSA designated RPI as a National Statistic in 2010,286 but cancelled the designation in 2013…… Ed Humpherson later de-designated CPIH, ONS’s preferred measure, as a National Statistic……..CPIH was re-designated as a National Statistic in July 2017 following action by ONS.

As the PAC points out nothing ever seems to happen.

In evidence to our inquiry Sir David Norgrove stated that UKSA was planning to respond to the House of Lords Economic Affairs Committee report in April 2019. This did not happen.

Sadly I can also vouch for this sort of thing as I wrote to the House of Lords on the 26th of February about this issue and if I ever get a formal reply I will let you know. Also I am awaiting a response from the ONS to the points I made at the Royal Statistical Society on the 13th of June last year. I think you get the message.

View

In general this is a good report which follows on from the report on the RPI by the Economic Affairs Committee and I welcome them both. However there have been nine years of failure here by the UK Statistics Authority where it has proven incapable of getting any sort of a grip. In fact it has made things worse. My experience of giving it evidence was that my time was wasted as it was going through the motions and ignored and or did not understand my points about the large revisions to the Imputed Rent numbers.

Also there is a danger that the establishment parrots the same old lines as for example this.

Chris Giles told us “Index-linked gilts, student loans and rail fares are all pegged to the RPI” and said that “the continued use of an index known to be wrong, takes money from recent graduates, commuters and taxpayers, and hands it as a windfall to longstanding owners of index-linked government bonds”.

Chris who is economics editor of the Financial Times has done some good work highlighting the failings of the UKSA. But it is also true that he has led a campaign against the RPI and previously ( now abandoned) in favour of CPIH. This means that the fact that CPI and CPIH are systemically wrong in the area of owner-occupied housing frequently gets ignored. It has also contributed to the wasted nine years as the establishment represented by HM Treasury were more than happy to get on board with a campaign to get lower inflation numbers otherwise known as CPIH.

After all HM Treasury could de-link student loans and rail fares from the RPI today if it wished. In my opinion they do not do so for two reasons the first is greed and the second is that they want the RPI to garner bad publicity.

Public Finances

There is a link here because over the years we have observed quite a few strategic issues with the UK Public Finances. Two large ones come to mind of which the biggest has been the hokey-cokey with the Housing Associations which have been excluded, included and the excluded again. This has had an impact on the National Debt of between £50 and £60 billion. Then there was the Royal Mail situation where a pensions liability of the order of £17 billion was initially recorded as a surplus of £10 billion.

Added to that I note that this is on the way.

While the change is mainly focused on presentation, we expect public sector net debt (PSND) at the end of March 2019 to decrease by £30.5 billion as a result of the consolidation of pension schemes’ gilt holdings and liquid assets.

On a stand alone basis that may be fair enough but the collective issue is of a large almost entirely ignored liability which increases the numbers here.

Today’s Data

We learnt that the run of better data had come to a close with some signs that the closing of Prime Minister May’s term of office has led to an opening of the spending taps.

Borrowing (public sector net borrowing excluding public sector banks) in June 2019 was £7.2 billion, £3.8 billion more than in June 2018; the highest June borrowing since 2015……..Borrowing in the current financial year-to-date (April 2019 to June 2019) was £17.9 billion, £4.5 billion more than in the same period last year; the financial year-to-date April 2018 to June 2018 remains the lowest borrowing for that period since 2007.

As to why there are several factors at play and in these times it is hard not to have a wry smile at this.

This reduction in credit accounts for around half of the observed £405 million year-on-year June increase in EU contributions.

There was something of a curiosity as well.

Interest payments on the government’s outstanding debt increased by £2.1 billion compared with June 2018, due largely to movements in the Retail Prices Index (RPI) to which index-linked bonds are pegged.

I have to confess that this development seems confusing. Because this time last year not only was the annual rate of RPI higher but the pattern was higher, so I will have to check how much the numbers are lagged by as this seems to be the factor at play.

Also there was some actual what we might call negative austerity.

Over the same period, there was a notable increase in expenditure on goods and services of £1.2 billion.

To that we can perhaps add this announcement via the BBC earlier.

Two million public sector workers are reportedly set to get a £2bn pay rise.

The Treasury will unveil the biggest public sector pay rise in six years as one of Theresa May’s final acts as prime minister,the Times reported.

Soldiers are set to get a 2.9% rise while teachers and other school staff will get 2.75%, police officers, dentists and consultants 2.5% and senior civil servants 2%.

This next bit seems to be unlikely though.

It is thought the money will come from existing budgets.

Comment

Today’s theme is one of reinforcing the Quis custodiet ipsos custodes line. Or if you prefer who guards the guardians? The UK Statistics Authority and Office for National Statistics regale us with rhetoric about “improvements” but misses the bigger issues and often makes them worse. Added to the problems I have highlighted earlier comes a click bait culture where it is increasingly hard to find the data you want. Also we get opinions on the data which is not the job of the ONS, as its role should be to provide the numbers. The situation with the UKSA is so bad I think it would be better to take the advice of Orange Juice.

Rip it up and start again
Rip it up and start again
I hope to God you’re not as dumb as you make out
I hope to God
I hope to God

Meanwhile I opened by saying so fat this week the economic data has been good but today we did get a possible flicker of a slowing from the tax data.

Central government receipts in June 2019 increased by £0.8 billion (or 1.5%) compared with June 2018, to £58.7 billion,

That night be a monthly quirk but it is lower than inflation.

 

 

 

 

 

Explaining the problem that is UK productivity growth

A regular feature of economic analysis in the credit crunch era has been where has the productivity growth gone? The knee-jerk reaction from establishment economists was as usual to assume that reality was wrong and their models correct and so they assumed that it would rise even faster in the future to make up the gap. For example back in June 2010 the hapless UK Office for Budget Responsibility forecast that UK productivity growth would have recovered such that wage growth would have been  be running at above 4% since 2013/14. Problem solved! Except that only in their Ivory Towers did such a solution work as below the clouds the situation changed little if at all.

To my mind it is the last 3 years or so that have really illustrated the issue as we have seen the official measure of economic growth rise on a sustained basis. On that measure the recovery has become mature and one would therefore have hoped that productivity growth would have picked up and risen noticeably. So it is especially troubling that we find ourselves wondering what happened to it right now. Even worse if this week’s Markit business surveys indicate a new trend of slowing economic growth.

The establishment could not ignore it for ever

Half way through 2014 someone at the Bank of England must have decided that enough was enough and that maybe something had changed.

Since the onset of the 2007–08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend………This shortfall is sometimes referred to as the ‘UK productivity puzzle’,

Indeed the comparison with past recessions was stark.

Even six years after the initial downturn, the level of productivity lies around 4% below its pre-crisis peak, in contrast to the level of output, which has broadly recovered to its pre-crisis level.

However the response of the establishment followed a disappointing theme as another hapless body gave us Forward Guidance on productivity.

A key judgement in the May 2014 Inflation Report is for productivity growth to pick up.

We can skip the cyclical arguments presented back then as we have cycled on so to speak but there were issues raised then partially dismissed which do apply.

Growth rates in output per hour  have been persistently weaker than GDP, reflecting strong employment growth over the past few years.

This reflects two factors in my view. Firstly ( and the Bank of England either forgot or redacted this) is that for years and indeed decades economists in the UK had wanted us to be more like Germany and keep more workers employed when a recession hits. The other has been an increase in supply of labour as more people have moved to the UK to find work. This is a politicaly charged issue and the Bank of England tip-toed around it.

In addition, it may be that the financial crisis led to an increase in labour supply in the United Kingdom.

But they have to face up to some of the consequences.

The crisis is likely to have reduced both current real incomes and expected future labour incomes, which may have encouraged more people to seek work and participate in the labour market.

In other words the labour supply curve shifted downwards as labour became cheaper and more of it was used. On that road there was less pressure to improve productivity as wages were lower. You may also note that right up to now we have been discussing weak wage growth and the establishment continues to expect a turn higher at every turn.

Output per individual

The Bank of England tried to shuffle past this issue but I think it matters a lot because there are strong hints of an issue from the GDP per head numbers.

GDP is now 7.3% above its pre-downturn peak and has been growing for 13 consecutive quarters.

We know that the population has grown however so that GDP per head is lower. If we look at the boom phase since 2013 then this has continued with GDP growth being 8.3% but per head only 5.2%.

Sectoral Issues

The Office for National Statistics has been listening to this debate and offered some views on Wednesday and today.

Administrative and support service activities has grown by the largest amount, with a growth rate of 22.3% for the 4 year period, closely followed by professional, scientific and technical activities at 19.1%.

Okay so they have been the leaders so who are the laggards?

production industries made up 3 of the 5 slowest growing industries. One production industry – electricity, gas, steam and air conditioning supply – was one of only two industries to experience negative growth across the four-year period.

I think that the recent mild winter may be a factor in the energy supply industry as it has high fixed costs but it is revealing that it is another area where production has been struggling. Shakespeare was ahead of the game with his point that troubles like this come in “battalions” rather than “single spies”.

Oh and I wonder if those calculating the numbers have overrepresented their own productivity!

However, administration and support service activities features toward the top end of both distributions,

It has had another go this morning and confined itself to the market-sector of the economy.

These estimates also suggest that lower capital service per hour worked and weaker than normal improvements in labour quality held back productivity growth in 2014.

So 2014 was a bit better but still below past experience. I was pleased that such numbers exclude matters such as imputed rent and see that as a success for my arguments and campaigns.

The Services Problem

This is the issue of how we measure this and it is twofold. Firstly there is the problem that many services are intangible and thus output measures are problematic. The other is that some gains here are from products which are in effect free but GDP measurements need a price (that is not zero). For example it is only anecdotal but a friend told me last week that Linkedin and Facebook were very useful for his business but he only used the free versions. So his productivity was in his opinion higher but our national accounts cannot measure it.

Back in 2014 an effort was made but it was vague. At least Price Waterhouse had a go.

Total revenues for the five most prominent sharing economy sectors – peer-to-peer (P2P) finance, online staffing, P2P accommodation, car sharing and music/video streaming – could rise to around £9 billion in the UK by 2025, up from just £0.5 billion today, according to new analysis by PwC.

Professor Diane Coyle has been looking into this and suggested some numbers to give us an idea of scale.

it is highly likely that more than a million people are providing services via these platforms. This is equivalent to about 3% of the workforce, although many or most of them probably do not regard this as employment in the conventional sense.

We wonder what is employment quite regularly on here of course. But it is missed also by the productivity numbers.

The debate about the UK’s productivity performance should take account of the fact that the sharing economy acts as a kind of technological progress, equivalent to increasing the amount of capital available in the economy. But this effect is not recorded in the measured statistics and productivity.

Actually as she points out it may even reduce it as things which are measured are replaced by things which are not measured.

Comment

At times of large structural change there are always going to be issues for official statistics. We have seen and indeed are seeing three large moves at one. The credit crunch blitzed some sectors and sent the whole economy into reverse. The official response has been to try to pump up sectors such as housing and banking. Meanwhile there has been enormous change in technology and the virtual world which we are often missed by the old ways of measurement.

Thus we need ch-ch-changes but the initial problem is the way that we have become wedded to GDP as a measure. Or to be more precise it would as a beginning be helpful if the UK returned to publishing more openly the three different GDP measures adding Income and Expenditure to Output. Why? Well the income figures from the US have added value but when I tried to get similar data for the UK I was told that Nigel Lawson scrapped much of it as I guess it “frightened the horses” to coin a phrase. Yet as Diane Coyle points out something seems to be happening.

In the past, the statistical discrepancy was of the order of £1bn, and more recently £2-3bn.. In 2014 it reached an extraordinary £9bn.

We can do much more to get data from the online world using so-called big data and web scraping. This will not give us a complete answer but it will be better and I believe there will be more cheer in it than the official data we get now. As the sun is out let’s have a little optimism and hope it will wean our establishment off pumping up the housing market.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Oh, look out you rock ‘n’ rollers
Ch-ch-ch-ch-changes
Turn and face the strange (David Bowie)