Even with manipulated GDP figures the UK remains mired in stagflation

Today the UK takes centre stage with its economic growth or Gross Domestic Product figures for the last quarter of 2012. After some weak numbers there is understandable nervousness ahead of the event based on the other economic statistics released covering that period. This led the National Institute for Economic and Social Research to offer this as its opinion.

Our monthly estimates of GDP suggest that output declined by 0.3 per cent in the three months ending in December

So not cheery news although there was something of an antidote yesterday afternoon when a rumour did the rounds of the financial markets that the number would be positive and perhaps 0.2%. The UK equity market seemed to catch onto this as it broke through the 6200 barrier and rallied by 67 points or 1.1%. But whilst 34 names are on the official list to know this number a day early (in addition to those compiling it) a rumour is just that and could have been a double-bluff.

Care is needed with these numbers

The UK produces its preliminary estimate of GDP growth first amongst the major nations which means that less time is available to check and collect data and information. Accordingly there is a higher risk of error and then revision. The orders is that around 45% of the data is available to which more data is added at the second estimate and extra checks are made on the third and (hopefully) final estimate when the numbers from expenditure and income are added to the output numbers. Just to be clear there are three ways of measuring GDP where output ( if you see GDP (o) that’s what they mean) is the one used by far the most.

In the credit crunch era this has proved to be somewhat dubious as research in the United States has shown that the income numbers have been a better and more accurate guide. We in the UK do our best to bury those numbers after Nigel Lawson thought they might confuse people when he was Chancellor of the Exchequer and requested that they be suppressed.

However the central point here is that the spot number presented in fact has an error range or confidence interval which nearly everyone will ignore!

It is not the future that is bright but the past!

Back on the 25th of October I discussed a way in which the calculation of GDP was being changed and concluded this.

we will record the same circumstance as giving a higher rate of economic growth than before

How? Let us look at the change.

The second is replacement of Retail Price Index (RPI) series with Consumer Price Index (CPI) series in forming the deflators

So if you have a given level of GDP and reduce your inflation reading, hey presto you have a higher level of real GDP. And as CPI is invariably lower than RPI that is exactly what has  happened! At the stroke of a pen you might say or as the group Pilot put it.

Hey,hey it’s magic!

Well according to the US economist Sam Williamson such methodology has now been applied to the past too, back to 1948 in fact. Take a look at what he thinks has happened.

For the last 62 years the United Kingdom’s real GDP has grown at a rate of 2.43%.

Has been replaced by

The new story is that for the last 62 years the United Kingdom real GDP has grown at a rate of 2.68%.

As we slap ourselves on the back for such an improved performance there are casualties.

The new real GDP number for 1948 is 14% lower than it was

So when people tell you that the post-war period was grim it would appear that over 60 years later the statisticians have caught up! Actually I am teasing as this really is shameful as 1948 as been picked for what reason? Perhaps because the RPI started then,so for convenience rather than any new reality.

Oh and perhaps someone will explain how are series (CPI) which only began in 1996 can be used as far back as 1948….

The Royal Statistical Society has requested a formal reply on this from the Office for National Statistics. For my own part I did a spot check last night on the 1997 data and it does seem to confirm Mr. Williamson’s claims.

Today’s number

It turned out that the rumours of a positive number were a spoof or possibly a double-bluff from someone looking for buyers for their existing investments as here is the official statement.

GDP was estimated to have decreased by 0.3% in Q4 2012 compared with Q3 2012

And in spite of the likely media hype about the spot figure the more important number is below.

GDP was estimated to have been flat in Q4 2012, when compared with Q4 2011.

So we remain -in spite of the statistical manipulation- in a situation described thus by David Byrne and Talking Heads.

We’re on a road to nowhere

And the major factor this time pushing us downwards was this.

Output of the production industries was estimated to have decreased by 1.8% in Q4 2012 compared with Q3 2012

If we look into the detail of this we see that a lot of the fall here was apparently due to summer maintenance in North Sea Oilfields taking place in winter. Apparently the summer was so poor this winter that they missed it! Or something like that! If we move on from that there is more troubling news to my mind from manufacturing as it fell by 1.5% and the falls were across virtually the whole industry.

There was a little ripple of hope and relief for the UK’s embattled construction sector as output rose by 0.3% on the quarter but sadly that still means that it is down 11% on a year ago.

Comment

If we move from the headline number due to the possible errors that may need revision and look for perspective we see that a UK economy at 100 in 2009 was at 102.9 at the end of 2012. Suddenly a few points of a percentage either way matter much less because they would not particularly change an underlying message of slow grinding growth. If we add in our inflation performance we return to one of the themes with which I started this blog back in late 2009 which is stagflation. No wonder those in charge of UK economic policy such as the Bank of England have started to use the word counterfactual to describe the lack of  real impact of all their monetary stimulus measures such as the £375 billion of Quantitatuve Easing. In my financial lexicon counterfactual is described as scaremongering to cover up failure.

Also I would like readers to remember that these numbers are poor in spite of the way that  they have been “improved” ( in my lexicon this means fiddled or manipulated) which appears on the evidence to “improve” growth by 0.25%. The idea that we had more growth as we ran into the collapse of 2007/08 is frankly pathetic and shameful.

This leaves us with another problem which is that our employment and indeed unemployment numbers are telling a story which looks different again as is put here.

The latest headline indicators for the labour market in the three months to November continue to show resilience, in contrast to the weakness in GDP.

If we take the caveat that we are not comparing exactly like with like as the employment numbers are only up to November we see that they show a better picture.

Employment increased (90,000), unemployment fell (37,000) and hours increased (7.8 million) compared to the previous three month period……..while over the past year employment rose by 1.9 per cent (up 552,000).

Except of course we have the problem that is the falling level of real wages.

Total pay (including bonuses) rose by 1.5% compared with September to November 2011

So if we use the latest numbers we have a fall of between 1.2% (using CPI) and 1.6% (using RPI). So tucked in here is at least part of the answer whilst the quantity of labour is good particularly in the circumstances the price (real wages) is not.

Stagflation it is then.

Battersea Park Adventure Playground

One of the pleasures of South London is Battersea Park which I have enjoyed both as man and boy. Unfortunately things are going amiss as I described in the tweet copied below.

On one side of Battersea Park we have £6million flats selling like hot cakes on the other we close the adventure playground

In addition to the geographical juxtaposition of extreme wealth and apparent public poverty we now have a site which looks like something out of a police state. We have locked park gates (remember this is a public park supposedly open to all..) and new fences with police presence. As David Byrne put it so eloquently.

How did I get here?

This entry was posted in Uncategorized. Bookmark the permalink.
Subscribe Find an Adviser
  • james

    On the subject of growth, have you been following the pathetic saga about Nick Clegg and the possible admission that public spending should have been higher?

    1. The idea that a building splurge would be a cure all seems rather far fetched to me (see Japan)

    2. It takes place against a background of assumed “cuts” on every programme, despite no-one actually looking at government expenditure

    3. It is immediately attacked by Labour, even though the coalition has actually spent more on capital projects than Labour had planned.
    In other words, the debate seems to have become so debased that I am not surprised that figures (as in your article above) are revised, changed, modified etc as there is no-one out there to examine things properly…

  • mike

    This GDP figure, revisable at later dates with no recriminations, could be the ideal tool to reduce the value of the £ as required.
    Only a few short week ago bankster King uttered that ”the £ is worryingly high”, in the short period since then, our currency has ‘collapsed’ by c6% and falling. Hence, Kings wishes have been granted – don’t tell me there’s no such collusion between these gov depts!!
    Now we face the perfect scene for King, – more QE plus a heafty dollop of inflation, aka debt deflation.
    Will uk based industries be able to take quick advantage of this gift? Will the balance of trade turn positive for the first time in years? I doubt it!

  • Alex

    The police will one day realise their patrol spots are on the play ground side of the locked gates. This will tell them which side of the fence their income is on and then they may wonder why they continue to protect those on the other side of the 99% fence.

  • DaveS

    Agreed, capital spending is yet another red herring (along with devaluation)

    Doubtless its coming whether its hapless George or his equally hapless Labour counterpart. Doubtless it will be focused on house building (we just love houses), and maybe some road building (with tolls of course) . I am sure the bosses of the construction companies can’t sleep with the excitement of their future bonuses.

    And yes. if you spend enough, then for a while and whilst you keep spending, the god of GDP will be happy. Who cares about the deficit – Merv has got it covered. We will have lots of empty new houses and empty new toll roads. The public will be told good times are coming again and they will start spending and……

    Hmmm – one slight problem the public hasn’t got any money as real incomes are falling fast..Hmmm – we don’t want them to actually earn more as thats bad for profits and “competitiveness”. We need to get them to borrow more – thats the solution. Hmmm they can’t borrow much on their low incomes without some more collateral. Hmmm we need a housing boom so they can borrow against their houses – THATS THE SOLUTION !

    Its so simple, we need a house price boom – then we can sell the empty new houses.

    I can’t believe nobody has thought of it before…….

  • jan

    Why are we all so hooked on GDP as the be all and all figure for how well the economy is doing? It’s misleading in that it only gives one side of the picture ie output. What about how much we import? I would have thought balance of payments would be a more logical thing to keep an eye on since it gives some idea as to whether we are in profit or loss as a country. Maybe the MSM should follow this a bit more closely. I believe the last time we were “in profit” was some time in the 80s.

  • forbin

    Hello DaveS,

    yup Agree 100% housing bubble must be reflated at all costs on that but with smaller and smaller houses at higher and higher prices

    Bedrooms that are the size of bathrooms , Gardens that don’t cover a window box and I think its still in place – no allowance for car parking – so they’ll all on the street

    Frankly we should build flats like on the Dutch scale and size – I remember a Friends one being quite large – still no parking but they did n’t need it – good public transport ( unlike us) – no idea if they still have minimum room sizes there – we don’t

    figures out – we lost in GDP stakes but most importantly – and not a peep from MiniTru, Manufacturing down 1.5% – so thats building our way out of a recession is it – NOT!

    Forbin

  • forbin

    correct !!

    the GNP is a better measure and the balance of Trade the most important

    Except those figures have been crap as well…….

    Forbin

  • Drf

    Hi Shaun,

    “Even with manipulated GDP figures the UK remains mired in stagflation”. Surely the UK is now heading inexorably for the Great Depression MkII, not only stagflation?

  • DaveS

    Hi Forbin

    I was worried until Merv explained it takes a few years to rebalance (and a few more devaluations presumably). There will be jam tomorrow.

    I was worried that those devaluations might stoke inflation and make the poor Brit consumer poorer. That can’t be good for domestic demand. Then I realised that won’t matter cos we will all be making luxury goods for them rich Chinese.

    I am feeling much happier now and plan to take all my money out of bank and spend it on jam – no point waiting for tomorrow.

    And porpcorn….

  • DaveS

    Thou shall have one god and one god only – the god of GDP.

    False GNP and trade deficit idols will not be tolerated – they are the work of the devil – particularly the trade deficit one which as you correctly point out has been evil for 30 years, even with North Sea black gold.

    If we had been watching trade deficits we might have realised that globalisation was going to be the death of us – thats not what they wanted. GDP however looked just great – well it did after a few improvements like CPI deflator, hedonics, geometric weighting and implied rents etc.

    Ever get the feeling we’ve been duped ?

  • Rods

    Hi Shaun,

    Another excellent frank analyses of where we are.

    From Dr Tim Morgan at Tullett Prebon:
    2001-2011:
    CPI inflation: 27%
    Property: 68%
    Gas: 168%
    Electricity: 97%
    Petrol: 59%
    Council Tax: 59%
    Water Charges: 68%
    Food: 39%
    Average Income: 38%

    As you can see CPI reflects very well the inflation on essentials, which to me is why we need an EPI, essentials inflation measures to best reflect how price rises affect the poorest in society where most of their income goes on essentials. The only thing that a dropped over this period is consumer goods, which you can’t eat and won’t heat your park bench (assuming your local authority, allows such luxuries!) much!

    The reality is that without a drastic rebalancing of the economy there cannot be any economic recovery in the UK, only stagflation. At some point we will have a full blown Sterling crisis and the choices then will be hyperinflation, defaulting or both. A combination of Japan and Argentina I think are good models to show the future and fate that awaits the UK.

    Seeing that it is Friday, here are a couple of links for good weekend reading. They are frank appraisals where the UK and Western world is. The first which has just been released by Dr Tim Morgan at Tullett Prebon and the second by Money Week on the UK’s position:

    http://www.tullettprebon.com/Documents/strategyinsights/TPSI_009_Perfect_Storm_009.pdf

    http://www.moneyweek.com/endofbritain

  • geoffk

    Shaun..Be careful with the claimant drop as many things are being cooked..They have now took people who are forced on to workfare off the count..And people who were on esa who have been on 12 months are now automatically means tested so if you have a partner who works part time or full then it is tough luck..You are off.

  • Anonymous

    Hi Forbin

    The issue of car parking you mention coincides exactly with something I was told on Thursday evening. There used to be a University of London Hall of Residence on my road which has been knocked down with the plan being to build a large block of flats. The number of car parking spaces provided in the design is apparently 6! Hence worries about street parking as I think more than one in 10/15 flats will have a car dont you?

  • Anonymous

    Hi Jan

    It did not use to be so I can remember many days when they were the crucial numbers and everyone had to be at their desks for 9:30 am UK and 1:30pm US trade figures. Now we have gone to pretty much the other polar extreme of very few caring at all.

    Extreme one was a mistake because flash numbers are very inaccurate andso markets were responding to incorrect data. However my profession has developed the habit of extrapolating trends such as trade deficits have been sustained and have not bothered us much so they do not matter at all! This is of course wrong and many of the same have not seen the irony in their prediction of a £ crisis over the past week or 2…

    If you drop out oil and look at the period since 2009 until November 2012 we have exported more (21.7%) but also imported more (17.2%). So we are good world citizens but because we import more goods than we export the deficit is growing.
    We are in fact quite good exporters in many ways (the MSM take the reverse view) but we are even better importers and there is the rub.

  • Anonymous

    Hi Drf
    We are in a bind and are going nowhere fast that is for sure. However the rise in employment (albeit with falling real wages) does offer a little hope so it is not for certain that we are in that bad a mess.
    Those in charge are much less sure as otherwise they would not keep trying to “improve” the numbers but lets face it they are wrong more often than not! And there is a catch because if they continue to make mistakes then yes a depression may well arrive.

  • Anonymous

    Hi Geoffk
    I agree entirely and watched an episode of Yes Prime Minister from 1983 which discussed exactly the same thing. So times change less than we might think!
    The claimant count has lost nearly all of its credibility and that is a general trend around the nations that I follow and not just the UK.

  • Anonymous

    When I went for a look they looked thoroughly bored and were doing their best to add to London’s pollution levels by sitting in stationary transit vans with the engines running. Whilst I sympathised with their wish to keep warm on a cold day I did muse on the subject of officialdom telling everyone about pollution and climate change but adding to it themselves!

    From Wandsworth Councils website

    “Reducing greenhouse gas emissions to slow down climate change and reduce reliance on fossil fuels
    A cleaner, greener, healthier and safer borough that does not compromise the
    wellbeing of future generations “

  • iglwy

    Your right. We can talk about unemployment and inflation until the cows come home. The real issue is the trade deficit. In 2010 the deficit was over £90 billion. If Britain stopped buying Audis for ten years and concentrated on domestic production it would be able to reduce the deficit. Some argue that a trade deficit is not a net loss to the economy but a net gain. See MMT.