Hamish McRae: Two surprises show we're not in recession

Economic View: Our economy is now around 4 per cent bigger than it was last year, yup, 4 per cent

The British economy is becoming more and more interesting. This week we have had two positive surprises. On Tuesday we had the fall in inflation to 2.4 per cent, a much sharper decline than expected, with the prospect that it may be below 2 per cent by the autumn.

Click HERE to view graphic

Yesterday we had a further fall in unemployment on the International Labour Organisation measure, down to 8.1 per cent, and a rise in employment of 181,000 on the quarter.

The first is encouraging because it holds the prospect that inflation might be running below pay increases later this year. As you can see from the first graph, wage growth excluding bonuses is running at just under 2 per cent a year. It does not need to climb much to get it back to 2 per cent, just as inflation does not need to fall much to come below 2 per cent. If that were to happen we would start to experience a rise in real incomes after the sharpest squeeze on living standards for a generation.

Falling inflation also has an impact on real growth, for if inflation goes down and money GDP stays the same that translates directly into growth. If money GDP rises to 3 per cent and inflation is 3 per cent there is a zero rise in GDP; if inflation then falls to 2 per cent and money GDP is up by 3 per cent, that gives you 1 per cent real growth.

But it is this second surprise, on the labour market, that is really exciting because it is one more nail in the coffin to the idea that the economy is in recession. The employment rate is up. The inactivity rate is down. The number of hours worked is up. Full-time jobs are up as well as part-time ones. Employment is up as well as self-employment. The private sector is creating five jobs for every one lost in the public sector. (The employment rate and hours worked are shown in the next two graphs.) It is plausible that in a few months that the total number of people in employment in this country may past its previous peak.

That is not an economy that is shrinking – or rather it could only be an economy that were shrinking were productivity plunging. That is improbable, given that these new jobs are entirely in the private sector.

Add in other data, such as rising car sales, reasonably strong retail sales, good tax receipts on VAT, and so on, and the picture emerges of an economy that must be growing, albeit slowly.

It is true that there are some labour market indicators that are going the wrong way: claimant count unemployment, probably the result of reclassification for people with disability claims, youth unemployment, and jobs for UK-born people as opposed to foreign-born ones. But these reflect wider social issues, serious ones to be sure, rather than telling us much about the economy.

This theme, that the GDP figures are wrong as they understate real growth, will be a familiar one to readers of these pages. But I had not realised quite how wrong previous data had been until I had another look at the scale of upward revisions that have been coming through almost unnoticed, including a batch last month.

The final graph shows the big picture of these. As you can see, the UK economy is now reckoned to be substantially larger than in previous estimates. The biggest revisions, going right back to the 1970s, came through late last year, but we have just had another set further upgrading growth numbers. The original estimates are shown, together with these two revisions. As you can see the boom was much larger than originally thought, and as a result the trough was not nearly as far down.

Taken together, these suggest that our economy is now around 4 per cent larger than was estimated a year ago, yup, 4 per cent.

If you take in early revisions, the understatement was even larger.

I point this out not to attack the Office for National Statistics because it is genuinely difficult to get to grips with anything as large and amorphous as a country's economy. It is simply to point out that people should use their common sense when trying to interpret what is happening to the economy, rather than agonise about the last decimal point of the data. Some numbers, such as tax receipts and national insurance contributions, are pretty firm. You can count how much money is coming in and no employer pays national insurance for people not on the payroll. Other numbers are not firm at all, and GDP figures are among the most nebulous. Beware next week when the second-quarter figures come out.

There is a further point to be made. Another bit of data came through this week, which would be consistent with the "our economy is bigger than we thought" theme. It is the results from the 2011 census. The numbers of people in the UK shot up during the past decade, rising to some 63.1 million, about half a million more than was previously thought.

We don't know whether this surge was partly the result of previous under-counting, nor even whether we are still under-counting. There are people who, for obvious reasons, do not want to reveal themselves to the census enumerators. But from the macro-economic perspective this surge would be consistent with a number of things.

One is that the economy did indeed grow strongly during the past decade: it sort of validated the red line on that bottom right-hand graph. It suggests too that job opportunities have been strong. There are some migrants who go on benefit, but most people do not come here if there are no jobs for them. The relative success of foreign nationals in the job market fits in with that.

But it also suggests that income per head may not have risen as much as we might expect. If revisions to the GDP data suggest the economy is larger than we thought, revisions to population estimates suggest that per head we may not be that much richer.

That leads to a final point. If you are interested in living standards, it is GDP per head that matters most. If you are interested in whether we can service the national debt, overall GDP and a growing workforce matter more.

News
people'It can last and it's terrifying'
Sport
Danny Welbeck's Manchester United future is in doubt
footballGunners confirm signing from Manchester United
Sport
footballStriker has moved on loan for the remainder of the season
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
News
Katie Hopkins appearing on 'This Morning' after she purposefully put on 4 stone.
peopleKatie Hopkins breaks down in tears over weight gain challenge
News
Ricky Gervais performs stand-up
people
Arts and Entertainment
Olivia Colman topped the list of the 30 most influential females in broadcasting
tv
News
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Sport
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Hare’s a riddle: Kit Williams with the treasure linked to Masquerade
booksRiddling trilogy could net you $3m
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
News
news Video - hailed as 'most original' since Benedict Cumberbatch's
News
i100
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Planning Manager (Training, Learning and Development) - London

£35000 - £38000 per annum + benefits: Ashdown Group: A highly successful, glob...

Business Anaylst

£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

£40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

£85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

Day In a Page

'I’ll tell you what I would not serve - lamb and potatoes': US ambassador hits out at stodgy British food served at diplomatic dinners

'I’ll tell you what I would not serve - lamb and potatoes'

US ambassador hits out at stodgy British food
Radio Times female powerlist: A 'revolution' in TV gender roles

A 'revolution' in TV gender roles

Inside the Radio Times female powerlist
Endgame: James Frey's literary treasure hunt

James Frey's literary treasure hunt

Riddling trilogy could net you $3m
Fitbit: Because the tingle feels so good

Fitbit: Because the tingle feels so good

What David Sedaris learnt about the world from his fitness tracker
Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Saudis risk new Muslim division with proposal to move Mohamed’s tomb

Second-holiest site in Islam attracts millions of pilgrims each year
Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering