Today is or if you read this later has been UK GDP day where we find out how the UK economy performed in 2017. For once there is a reasonable amount of debate and uncertainty caused by the outage to the Forties pipeline for much of December as you see in the initial or preliminary estimate the last month in the quarter has very little actual data and is mostly guesstimates. Meanwhile the UK establishment has been on the case and with intriguing timing has looked at GDP or Gross Domestic Product. Here is the Deputy National Statistician on the subject.
GDP measures the market-based economic activity: its primary purpose is to measure an economy’s production, income and expenditure. To calculate GDP, we take all the economic activity and use market prices to weight these different items to estimate the total size of the economy.
Fair enough as it starts but as regular readers will be aware there are more than a few problems with such an approach. Let us start with things that do not have a price or have a very low one.
GDP values goods and services at the price they are sold at, but if the value to me or you is higher than prices we pay we are even better off. Take, for example, free mapping services available on the internet – these are very valuable, but the cost of provision is relatively small. This difference between true benefit and price or cost is not included in GDP;
Next comes things we provide for ourselves.
The non-market activity that GDP excludes is important to well-being. For example, the ‘home production’ of childcare is hugely valuable in terms of child development, and volunteering helps improve the lives of millions of people in the UK;
I have used the example before of everyone suddenly mowing next doors lawn or looking after next doors children. As they would be paid recorded GDP would rise but economic activity would be unchanged. Also there is the issue of use of resources which GDP ignores.
So far so good from our Deputy Statistician but then he reverts to type and the emphasis is mine.
There are a few exceptions to the market-based approach, notably that GDP includes government-provided services and the economic activity imputed for home owners.
This is a big issue because as I pointed out in detail on the 23rd of May 2016 you are using a made-up number in a series that is supposed to be for market prices. It is a clear contradiction and causes all sorts of problems.
For those who have not looked at the numbers then nominal UK GDP has been revised up by at least £50 billion in each of the years 1997 to 2006 due to Imputed Rent and then by a declining amount up to 2011. To give an idea of scale VAT fraud is considered a big deal but changes to it top out at £2.1 billion in 2011.
This was officially declared a “discontinuity” but we carried on regardless in terms of methodology as the numbers changed. The issue of how to treat government services is another problem because it is fair to argue that you have to do something as what government;s do vary but it is also true that prices in that sector and hence GDP are unreliable and in truth are often made up rather than collected. If you want to take a Matrix style blue pill he is the official view on Imputed Rent.
Likewise, if imputed rents were not included within GDP then an increase in home ownership would have the effect of lowering a country’s GDP.
The other problem created by Imputed Rents is that the logic above means the establishment has now put them in the inflation figures in the CPIH number. So you end up being told that the UK housing sector is a drag on inflation which is why first time buyers are struggling so much, oh hang on…….
The Governor of the Bank of England has not delivered a defence of GDP he has delivered a defence of his economic forecasts. From Bloomberg.
Asked in a BBC radio interview to quantify the damage from Brexit, he said the economy is now about 1 percentage point smaller than it would have been had the 2016 European Union referendum gone the other way, and that the gap will widen to about 2 percentage points by the end of the year.
“What it works out to is tens of billions of pounds lower economic activity,” he said. “The question then is how do we make that up over time by growing above potential.”
Based on the estimated size of the economy at the end of 2017, the lost output would amount to as much as 40 billion pounds ($57 billion).
Odd timing only a few hours ahead of the GDP release but perhaps the rarefied air in Davos made him forget that. After all these days he does not get the numbers 24 hours early.
The news was in fact pretty good.
UK gross domestic product (GDP) was estimated to have increased by 0.5% in Quarter 4 (Oct to Dec) 2017, compared with 0.4% in Quarter 3 (July to Sept) 2017.
It was driven by something familiar and something less familiar but if anything even more welcome.
The dominant services sector, driven by business services and finance, increased by 0.6% compared with the previous quarter……..boosted by the second consecutive quarter of strong growth in manufacturing……….Manufacturing was the largest contributor to growth within production, at 1.3% and contributing 0.13 percentage points.
We get little detail on the manufacturing numbers but there is an intriguing hint of a further pick-up in the employment numbers in the services breakdown.
The business services and finance sector continued to be the main driver of growth in services in the latest quarter, increasing by 0.8% and contributing 0.28 percentage points. There was broad-based growth within this sector, with the largest contributor to GDP growth being employment activities, which increased by 3.6% and contributed 0.04 percentage points.
Here is a quirk for you which immediately made me think of the “NHS crisis” which is all over the media.
The largest contributor to this sector was human health activities with growth of 0.6% and contributing 0.03 percentage points to GDP growth.
Maybe not such a bad health performance although as discussed earlier the data is both uncertain and unreliable.
The construction problem continues.
Construction output was estimated to have decreased by 1.0% during Quarter 4 2017, following contraction in the previous two quarters. However, annual growth was 5.1% between 2016 and 2017, demonstrating that the most recent contractions are relatively small compared with the large growth throughout 2016 and into the first quarter of 2017.
So it continues on a weak recessionary path. Also I am not a fan of the way that the Statistical Bulletin provides context in the way that it does as it is supposed to be for the data release not news management or opinion. That is for elsewhere as how can you be the judge when you are the main witness?
If we step back for a moment we see that the UK economy has in 2017 exhibited a Napoleonic virtue. The one when he asked if particular generals were “lucky”? It has been shown by how stable things have been when so many were predicting instability post the EU Leave vote.
GDP was estimated to have increased by 1.8% between 2016 and 2017, slightly below the 1.9% growth seen between 2015 and 2016.
The luck part has come from how the favourable world economic position has helped manufacturing exports in particular and offset the impact of higher inflation on real wages and consumption. Unlike say in 2007/08 when a weaker pound helped little because the world economy was in poor shape.
As to the detail there is some hope that the ordinary person may begin to see some benefit as GDP per head rose by 0.4% making it 1.2% higher than a year before. But this is an area where we have struggled in the credit crunch era in the same way as with wages and productivity. Although of course last week brought possible better news on productivity via the telecoms sector.
On the other side of the balance sheet is construction and for all the spinning noted above the problems created by Carillion will not help the early part of 2018. If it helps my Nine Elms crane count is at 25.
As ever we need to note that the numbers are not accurate enough to be analysed to the degree they are and we have received a reminder of this from Japan today. From the Financial Times.
Japanese cryptocurrencies exchange abruptly halts withdrawals
You see by some calculations Bitcoin and the crytocurrencies were expected to provide a 0.3% boost to GDP in Japan.