Are UK readers feeling 4.6% better off today in line with the GDP “improvement”?

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Today is one which has not only updated us on the state of play in the UK economy but has also told us more about how it is going to be measured. For those curious about the latter category, it is that we have been told more by the Office for National Statistics about its plan to apply the new national accounts standard called ESA-10 which will lead to quite a boost in recorded UK Gross Domestic Product when it is fully introduced in September. Easy that way is it not? However let us first peer under the bonnet of the UK economy under our existing rules.

Retail Sales

We have got used to strong retail sales numbers from the UK but the British Retail Consortium was less upbeat earlier today.

UK retail sales were up 0.5% on a like-for-like basis from May 2013, when they had increased 1.8% on the preceding year. On a total basis, sales were up 2.0%, against a 3.4% rise in May 2013.

However if I may be forgiven an early football reference it was a game of two halves as shown below.

The 3-month average year-on-year change for Food was -0.2% in total, turning negative for the first time since our record began in 2008, excluding Easter distortions. For Non-Food, the 3-month average was 4.3%, ahead of the 12-month trend of 3.8%.

So it would appear that retail sales of everything but food are going well but that it is seeing price cuts which from the point of view of the BRC are a “race to the bottom”. The rest of us will welcome the chance to buy some cheaper food! Although a little care is needed here. In its price report the BRC told us non-food prices were falling and there was a little bit of food price inflation. Perhaps they need to get their story straight!

Lloyds business survey

Thier measure of economic activity in England and Wales was very positive yesterday.

Output growth picked up to a five-month high across the English regions as a whole, with the index rising from 59.3 in April to 59.8 in May. The latest reading pointed to a strong overall rise in business activity,

It was also refreshing to see a measure led by the North-East at 63.5. I do not know if it is in some way related to the independence debate but the figures for Scotland showed slower growth at 54.

Production

This too is undergoing a surge rendolent of a fine summers day albeit that the latest numbers are for April.

Production output increased by 3.0% between April 2013 and April 2014…….  Manufacturing increased by 4.4% over the same period.

We know that the subsequent business surveys have been very positive too, so the sector which represents some 15.2% of our economy looks to be surging ahead. However for perspective we also need to consider where we stand overall.

Production and manufacturing were currently 11.3% and 7.0% respectively below the pre -downturn GDP peak reached in Q1 2008.

The gap between the two numbers is partly down to the decline in North Sea Oil and Gas output but there appears to have been a stabilisation in that and maybe a change.

the extraction of crude petroleum & natural gas. This subsector increased  by 2.3% (over the year to April)

I have discussed this before and of course it has implications for the debate over independence for Scotland. However we move on with the impression that production in the UK is going well. My only issue here is that as these are by definition actual items and most places these days count by computer, why do the numbers take so long to arrive?

A time for a counting

It is perhaps something of an irony that the “improvements” to UK GDP measurement are arriving just as the economy is in a boom. Although I guess many of you will be wondering about the methodology and indeed modus operandi in nations being told they are better off after a period where the clue is in the name Great Recession!

Let us move onto the numbers themselves which are slap bang in the middle of the range we were expecting and the emphasis is mine.

The latest estimate of the total impact of all the improvements planned for September 2014  shows an estimated increase in the level of GDP in current prices in 2009 of 4.6%, or around £65 billion. That is made up of £32 billion stemming from the ESA 2010 related changes announced today and the £33 billion of other improvements already announced on 29 May.

Does anybody feel 4.6% richer out there? Of course we know that reality is unchanged it is that out statistical body is applying changes to the way that it measures it. Put like that the size of the change itself is a challenge to both their past and present methodology as well as their credibility.

Let us break down the major moves

The good

Over time the economy changes, and we have seen an example of that above where the UK economy has nearly regained its pre credit crunch peak overall but production is still lagging by 11.3%. So the numbers need to be rebased to fit the new reality and as we are shifting in favour of areas which have been doing best there is an inevitable rise in recorded output. Other numbers need change from time to time also and we will have a  changed category for houses which are self-built for example. I must admit I was surprised to learn that they were not being counted correctly as after all a house is a rather basic object! The impact of the latter change is shown below.

The impact of the new methods is to raise the level of GDP in current prices in 2009 by £4 billion.

In essence a profit margin or mark-up is being added to the costs of construction as I now start to wonder how good an idea this is?! In the current era of higher house prices we can expect this category to boom. Imputed profit anyone?

The bad

The major change in this category represents how we measure research and development or R&D. This used to be counted as it led to actual output but now will be treated as an end in itself. This has quite a material impact as you can see below.

Treatment of most Research and Development expenditures as investment rather than intermediate consumption will increase Gross Fixed Capital Formation (GFCF) and boost the level of current price GDP by approximately £22bn in 2009.

I think that this is wrong on two counts. Firstly there is the risk of double-counting and secondly R&D is a means to an end as in something better and not an end in itself. This will suit politicians who will no doubt be racing to “improve” how some expenditure is categorised. Putting it another way whilst Concorde was a beautiful plane which made your heart soar, it was an economic failure. If we had spent twice as much on R&D would we be better off?

There are some other rather bizarre components here such as a reclassification of weapon systems worth £3.5 billion but the worst is this in my opinion.

The new treatment of funded defined benefit pension schemes will increase the level of GDP in current prices by approximately £5bn in 2009

Will we count the money again when the pension pays out?

The ugly

I guess many of you were waiting for this bit. I have written before about adding drugs and prostitution to the UK GDP numbers. This is something of a European directive so that we can be more comparable with the rest of Europe. However as readers of my updates on inflation measurement this is something we follow intermittently and mostly when it suits our establishment. Here are the issues with raising our economic output by 0.7% or just over £10 billion via this route. This is for those who are supposed to measure this.

Prostitution: Finally, extensive data gaps have been filled with assumptions, recognising that this area of the economy is very difficult to measure.

As in they have no real idea!

Drugs: Groom and Davies (1998) represents the last comprehensive attempt by ONS to estimate the level of illegal activities.

Yes that is 1998 as we wonder if The Daily Mash is now calculating this section of the UK national accounts. In these times it is increasingly difficult to tell spoof from reality. There is of course the issue of whether one should count illegal activities full stop. Obviously there is a moral hazard issue but also there are other implications as how exactly would you go about taxing it?

Comment

There are two themes to today’s update. We start in upbeat fashion as we wait for the later update on monthly GDP from the NIESR which was previously 1% or about as fast as the UK economy has ever gone. Then we move to changes in  the calculations of GDP which have some clear weaknesses. That is before we get to the issue of whether it is a reliable indicator in the first place. Actually I think that peak credibility for the use of GDP has been and gone and that we need to find a measure of economic output per person. Otherwise we should not be seeing things like this from the Guardian.

National Debtline has published a report recording a 140% rise in the number of people it had to help with debts on household bills since 2007, before the financial crisis began.

 

 

 

 

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  • shrimpers

    Masterful Shaun

    GDP/GNP, whatever, are anachronisms, and as we are witnessing alongside inflation/employment fallacies, another method to hoodwink the majority of the population who don’t read thus blog

    Surely the country’s ability to pay its way and to reflect ordinary peoples income/wealth would be better portrayed from tax returns and their respective generation (e.g. Income, VAT etc) plus earnings relative to essentials including house purchase affordability.

  • Pavlaki

    I do have to wonder about statistics for an entire economy being measured to one tenth of one percent as in retail sales of food dropped 0.2%! And now we are going to add drugs and prostitution which no one really knows what the real figures are!! So on one hand we are taking at face value extremely tiny movements in data and commenting on it and yet they are about to throw a guesstimate into the mix – which will no doubt be measured to one tenth of one percent as well!! It’s crackers! The temptation for governments to boost the estimates for drugs and prostitution when GDP sags a bit must be significant. After all – who can argue with the stats if they are made up anyhow.? I think I’ll join Forbin on the sofa with some popcorn. This really is getting to be quite a show!

  • shrimpers

    I meant to add, tax returns/Govmt income streams vs expenditure rather than this GDP nonsense comparison

  • forbin

    oh come , Shaun, you’ll never land that big job with Mini Tru

    repeat after me , four legs good , two legs better !!

    now with a straight and somber face announce..

    ” today the chocolate allowance has been increased from 4 ounces to 2 …”

    Forbin,

    Ps: does the new measures mean that on balance toffee popcorn is now cheaper than regular ?

  • forbin

    Hello Shaun,

    Ofcousre we’re better off , aren’t we?

    today we have a news item to warm the hearts of economists and enviromentalists every where

    http://www.bbc.co.uk/news/business-27779815

    This will ” trickle down” to those pensioners and other poor people who’s Smart meters will help them save money in the middle of a cold harsh winter when the turbines aren’t spinning………

    They will be “better off” won’t they ?

    The Houses of Parilment will be kept warm though , need to be comfy to run the country , won’t they ?

    Forbin

    “The Lunatics (Have Taken Over the Asylum)” Fun boy Three

  • Ian

    I’ve always thought the GDP figures understated the UK’s performance compared to Europe. When travelling to Paris or Milan everything looks 80′s and decrepit. I also think the trade figures arent right, there is no way you can run a deficit that large for that long. The ONS is simply missing huge volumes of trade!

  • therrawbuzzin

    Scotland’s GDP gets less of a boost because its figure is less affected by jiggery-pokery.
    I factually feel 0.1% worse off because I eat.

  • Pavlaki

    Maybe we have more hookers and dope? The GDP revision will show the correct comparison?!

  • Anonymous

    Hi Shrimpers

    Thank you.In many ways GDP has been overused and over-employed. What I mean by that is that it was never intended to be put to the purposes and to be under the pressure it is put. Adding to the pressure with the changes above is simply window-dressing, with the exceptions I highlighted.

    You do not have to be a worldly cynic to wonder if the fact that we have experienced a recession/depression is the driver for us being told we were better off all along…

  • Anonymous

    Hi Pavlaki

    You are entirely right to question how we can analyse changes of 0.1% as significant when the numbers are nowhere near that accurate. I recall a couple of years ago when I looked at the 3 different ways of calculating GDP in my subject of yesterday, Portugal, and the difference was 4% between the smallest and the largest. I cannot give you numbers for the UK because some years ago the then Chancellor Nigel Lawson gave instructions for only one to be publicly available. Presumably on the logic of don’t frighten the horses…

  • Anonymous

    Hi Forbin

    Thank you for reminding me. As I did my shopping at the weekend I spotted that a bag of own brand (Tesco) toffee popcorn had fallen in price from £1.10 to £1. Maybe the fall in corn futures (US $4.45 now) is having a effect! Although of course I do remember reading that for a box of shredded wheat the box costs more than the wheat, Qi I think was the source.

  • Anonymous

    Hi Ian

    That is an interesting line of thought. How would you go about itemising and putting a number to the thought that the UK GDP performance has been understated?

    One factor in favour of your logic is the way that London has often been favourably compared to Paris recently including by some who have joined the exodus from the latter to the former. We were always previously told that out infrastructure was poor and our streets dirty etc..

  • Anonymous

    Hi therrawbuzzin

    In what way is this so? After all the same methodology is applied..

  • Jim M.

    “extensive data gaps have been filled with assumptions”

    Literally and figuratively priceless!

  • Anonymous

    Hi Jim M

    I was always told to never assume (” as it makes an ASS out of yoU and ME”) but statistical school apparently missed that class.

  • Jim M.

    Hi Shaun,

    And we wonder why there is a gulf between outcomes and expectations? Allow me that kind of latitude and I’ll prove up is down and Elvis is my neighbour.

    What strange rules you economists play by. I sometimes wonder if you’re not all making it up as we jolly along? ;)

  • Anonymous

    Hi Shaun,

    there is a simple solution, to calculate GDP on actual expenditure, and also quantify actual items purchased by weight or volume.

    For illegal/unrecorded activities like prostitution or drugs, use tax evasion rules and asset recovery to target the mafia bosses.

    I don’t know if British politicians / bureaucrats are incapable or just unwilling but the result is a failing state either way.

  • therrawbuzzin

    Scotland’s economy differs slightly from the UK’s as a whole; it is higher in goods, etc. and lower in intangibles. Goods which can be quantified
    Assumptives will thus form a smaller part of Scotland’s GDP.

    As Scotland accounts for something like only 9.8% of GDP, it escapes the focus for boost and some of the jiggery-pokery.

  • Anonymous

    Great analysis, Shaun. The introduction in September of new GDP estimates based on ESA-10 by ONS will coincide with the publication of quarterly consumer price series for owner-occupied housing based on the net acquisitions approach for the UK and for all other countries in the EEA. A May 2014 ONS paper, “Impact of ESA95 Changes on Current Price GDP Estimates”:

    http://www.ons.gov.uk/ons/dcp171766_365274.pdf

    indicates that this would add £4 billion or 0.3% to UK GDP in 2009, and from less than £1 billion to £4 billion in any given year between 1997 and 2009. While this change does not command the “sex and drugs and rock and roll” interest of adding illegal activities to UK GDP, it will nonetheless have an important impact. For comparison, in 2009, illegal activities would add £10 billion to GDP, and from 1997 to 2009 would vary between £7 billion and £11 billion.

    I suspect almost all of this own-account construction activity would represent residential construction. The ONS pilot index for net acquisitions estimated from 1988 to 2011 for the CPAC was based on national accounts estimates. It did include estimates for self builds, and the technical paper states: “Between 1996 and 2011 the weight of self build properties within OOH(NA) ranged from 2.6 to 4 per cent.” One wonders if the new pilot index calculated for Eurostat incorporates these revisions to the National Accounts estimates and if they shouldn’t show higher numbers. As I understand it, in terms of pricing, self-builds would be measured using the renovations price index, not the housing price index.

    I was actually surprised how important self-built homes seem to be to the British economy. It seems they are substantially more important than they are to the Canadian economy. Andrew Baldwin

  • Anonymous

    Hi Andrew

    I too was somewhat surprised by the size of the self-build sector in the UK economy. I know personal experience has it flaws but I only know of one couple who have actually gone ahead with such plans. But it does seem to be in the news so I will look out for it.

    http://www.selfbuildportal.org.uk/latest-news/12-news-archive/275-uk-s-first-self-build-community-gets-the-go-ahead

    I would have thought there would have been more self-builds in Canada so i guess it must vary a lot.