10th June 2014 by Shaun Richards
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.
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.
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
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 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?
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?
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.