Today is a day where the UK economy is likely to be able to bask in the equivalent of the summer sun that feels like it has been beating down on the UK for ages now. However like sustained hot weather, good periods of economic growth have been extremely rare in the UK in recent times. Indeed the thunderstorms which struck on Tuesday night seem much more of an apt analogy for the credit crunch era.
The Office for National Statistics (ONS) has released these numbers this morning.
Gross domestic product (GDP) increased by 0.6% in Q2 2013 compared with Q1 2013…….GDP was 1.4% higher in Q2 2013 compared with the same quarter a year ago.
So there is plainly some better news there even if the annual comparison is flattered by the fact that there was an extra Diamond Jubilee bank holiday last year. In fact the better news spreads to my profession of economics too as for once most forecasts were if not on the button quite near. That does not happen that often these days.
Looking into the detail there was some hopeful news here too.
All four main industrial groupings within the economy (agriculture, production, construction and services) increased in Q2 2013 compared with Q1 2013.
Not since the autumn of 2010 have we seen that although care is needed as the service sector was by far the largest influence providing some 80% of the growth. Not quite the rebalancing we were promised is it? But at least manufacturing grew as opposed to the contraction at the beginning of the year. Also construction is showing signs of emerging from the economic depression that has been inflicted on it which is welcome to a sector which has been experiencing the equivalent of a nuclear winter.
In Q2 2013, output in the construction industry was estimated to have increased by 0.9% compared with Q1 2013
What about the “rebalancing” we were promised?
The last Governor of the Bank of England Mervyn King used to regularly regale us with tales of likely rebalancing in the UK economy away from services towards manufacturing and industrial production. Let us see how that went.
A partial recovery in (industrial) output in 2010 was not sustained and the sector remains 13.9% below its 2007-08 level. As compared with levels in 2000, output is some 16.2% lower.
So it has faced its own depression and lost decade and interestingly some of it took place before the credit crunch was even a figment of our imagination. However the area we are supposed to be rebalancing away from has done a lot better.
After a fall of 5.4% from the peak in Q1 2008 to the trough in Q2 2009, services output now stands just 0.2% below its peak, having almost recovered to the previous level of output.
So in fact services have recovered and industrial output has a long way to go. A long way from the rebalancing of our economy that we were promised is it not?
Indeed there is food for thought on this subject if we look at the area of our economy that is currently growing the fastest.
Between Q2 2012 and Q2 2013 distribution, hotels & restaurants output increased by 4.0%.
I hope that hoteliers and restauranteurs will forgive me if I hope that a fair bit of distribution growth is in there. After all Napoleon Bonaparte did call us a nation of shop-keepers.
Sometimes it takes a little while to get one’s head around the numbers as there can be evidence of one step forwards and two steps back. For example the last set of numbers for the first quarter of 2013 showed Gross Domestic Product rising by 0.3% on the preceding quarter. However if we then factor in this.
In Q1 2013, GDP was estimated to have been 3.9% lower than the pre-financial crisis peak in Q1 2008. Previously GDP was estimated to have been 2.6% lower for the same period.
So in fact for one step forwards in overall output terms we had in fact taken five steps back. Eek! This is a reminder that these numbers are often heavily revised and a further reminder that the credit crunch is different to what was regarded as the normal pattern as ordinarily recessions are revised higher and not deeper as time passes.
So our economy grew but ended up having a lower level of output than we thought we already had with the main culprit being this.
The peak to trough fall of the economic downturn in 2008/09 is now estimated to be 7.2%
If you think about it this change is very significant in several ways. Firstly the credit crunch had a deeper and more severe impact than our official statisticians originally thought. Secondly although statisticians will have been crawling all over the data like a particularly itchy rash, some 4 or 5 years later a fundamental change has been made. Those who have made the case for economic policy based on nominal GDP targeting face the inconvenient truth that too often they will be aiming at the wrong target.
Problems with the use of GDP numbers
I have discussed the many issues in this area in detail in the past on this blog (for example here http://www.mindfulmoney.co.uk/wp/shaun-richards/todays-uk-economic-growth-gdp-update-poses-more-questions-than-it-answers/ ) but recently a new potential anomaly has come to my attention.
If we look at the official numbers this has been contributing to UK economic growth.
The index for government & other services increased by 0.1% in Q2 2013, following an increase of 0.4% in the previous quarter……. Between Q2 2012 and Q2 2013 government & other services output increased by 1.6%.
This is, of course, somewhat inconvenient for the austerity mantra unless you use the austerity definition provided by my financial lexicon. If we look deeper the apparent paradox grows as there was no fall in the government spending category which has grown by just under 4% in the credit crunch era and is the only main category to have risen.
Examining the numbers
If we put these numbers under the microscope we see that there has been very little inflation in this sector and actual disinflation in 2011-12. If we use the implied deflator for this area it was 100 in 2009 and rose to 102.3 in 2011 before falling to 101.7 in 2012. So much lower than the overall implied deflator which rose by 6.7% over the same period or the official -Consumer Price Index- measure of inflation which rose by 11%.
If we recall that “real growth” is calculated by taking the output numbers and then subtracting inflation as measured by the deflator I hope that you get my point. Keeping the deflator low raises the level of recorded growth and so there are questions to say the least about how our govenrment sector has done so well in this regard. After all, are not areas such as health and defence subject to considerable inflation?
This issue arose in discussions with Pete Comley who asked me for some technical advice on his recently published book called “Inflation Tax”. He had looked into the government numbers provided by the ONS and was stunned by the deflator numbers and lack of apparent justification for them. Perhaps the government could give the rest of us some advice on how to keep inflation so low……
Today’s economic growth numbers from the UK are welcome as they show a hopeful trend in 2013 and because they have been achieved in spite of a difficult international environment. Also anything which makes our debt problems look even marginally more affordable should be accepted with welcome arms. However an annual rate of growth of 1.4% is only a marginal improvement in our conditions and if we look backwards for perspective we note that we have only grown by 2.2% since 2010 and that we are still some 3.3% below the crisis peak.
In addition there are many problems with using GDP as a measure of economic growth and national well being. As only 44% of the data was available, the danger of revisions to today’s report is even larger than normal and in truth we can never be sure that we ever get the numbers right. Furthermore as I have discussed today as the light of scrutiny is applied to the numbers more and more potential anomalies, discrepancies and questions emerge.