How has the picture of the UK economy changed?

 

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The Independent Online

Number-crunchers have been in overdrive today because the Office for National Statistics has unveiled how a pan-European overhaul of GDP statistics has affected its estimates of the performance of the British economy in recent years.

This is purely a measurement issue. It stems from, among other things, changes in how research expenditure by firms is recorded by statisticians and also new estimates of the size of the domestic market for illegal drugs and prostitution. The changes don't mean we're financially any better off than before the ONS published the new data.

Nevertheless, the revisions do shift the GDP growth picture materially.

So how has that picture changed?

Well, the ONS now thinks the great 2008-09 recession was less severe than before:

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Rather than falling by 7.2 per cent, the level of real GDP sank by 6 per cent (which is incidentally in line with the ONS's contemporary estimates from 2008/09).

It also thinks the economy has grown more quickly since the recession, as these quarterly upgrades show:

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Growth under the Coalition now looks stronger than it did before:

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Cumulative growth since the second quarter of 2010 has been around 1 percentage point higher. The Conservatives will claims this upgrade as a vindication of their economic strategy. Critics will point out that growth was still very weak and would have been higher without George Osborne' front-loaded fiscal austerity. No change there then.

What about cross-country comparisons?

A Treasury spokesman claimed today that the economy has now posted the third best performance in the G7 since 2010 and had grown by more than Germany and France over the past four years.

Is this true? The GDP growth revisions only go up to the end of 2012. The revisions for subsequent quarters will be published later in the year. But if we apply the existing growth rates to the new level of GDP we can get an estimate. And this suggests the Treasury is correct*:

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The UK's revised growth since Q2 2010 (the dotted red line) is now slightly ahead of Germany's.

However, this calculation comes with important caveats. The present post-2012 growth rates might well be revised by the ONS. And the growth rates of Germany and the other European G7 nations might be revised too under the Pan-European statistics shake-up, altering this picture.

Moreover, the ONS stressed today that the recession was still the deepest since the Second World War and that the length of time we took to emerge was still the longest on modern record:

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The dotted black line is the latest estimate for the path of GDP since the 2008 slump and the solid black line is the previous estimate. So even with the shallower downturn and stronger growth since, the UK clearly took longer to climb back up to the pre-crisis peak than following the 1990s, 1980s and 1970s recessions.

Are there any monetary policy implications from this new information? Michael Saunders, an economist at Citigroup, has suggested that stronger growth in recent years could persuade the Bank of England to put up interest rates earlier because it will interpret this as meaning economic slack has been used up more quickly. However, the Bank could just as easily interpret stronger growth, combined with subdued inflation and wages, as signalling that slack was bigger than it first thought, implying rates can stay down for longer. No change there then either.

And the notorious productivity puzzle? Before these revisions UK output per hour in 2014 was around 13 per cent below where its pre-crisis trend would have taken it (see here for my take). Assuming the level of real output is ultimately revised up by around 2 percentage points that diminishes the size of the gap that needs to be explained to 11 per cent. So the puzzle is smaller - but it's still very large.

This chart, courtesy of Kevin Daly of Goldman Sachs, shows the difference made:

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Better, but still dreadful.

All in all: as you were.


*I've omitted Italy from this G7 chart to avoid cluttering it up too much. Given the country's horrible GDP performance that's also an act of kindness!

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