How statisticians are coping with an economy that you can't touch

The three phenomena of weightlessness, intangibility and globalisation are having profound effects on our economy and our statistics

The rise of digital downloads, streaming media services and cloud-based computing are reducing demand for their physical competitors (AP)

Better trade statistics are important for the UK as it prepares to leave the EU: policy makers want to understand how to best support the UK’s trading position.

Trade and globalisation are also hugely important to understanding the UK’s economy.

In part this is because the UK’s exports and imports combined are valued at around 60 per cent of GDP.

Arguably more important is that trade is just one aspect of increasing globalisation that is shaping economic development. It is our job to measure and describe the UK’s modern and changing economy and to do that you need to understand trade and globalisation.

Just over 20 years ago, Diane Coyle wrote [in The Independent] about the weightless economy. By this she meant that economic activity was becoming less about producing material goods and more and more about services.

This trend has continued with digital downloads, streaming media services and cloud-based computing reducing demand for their physical competitors. These same trends have affected trade with a growing share of the UK’s exports accounted for by services.

The measurement of trade and GDP are based on the National Accounts, but that accounting framework was designed when the economy was much more “weighty”. The move to more services in GDP and trade poses challenges for economic measurement.

Measuring services is challenging as, unlike for goods, there is often nothing physical to count and identifying a price can be difficult. Trade in services poses further problems as there are no customs arrangements to measure cross border flows.

We also see that the boundary between goods and services is becoming more blurred. Companies selling aero engines also provide an extensive set of services to keep them working reliably and efficiently. Exports of services provided by manufacturers were worth £14bn in 2016.

One particular, and often international, service that is of growing importance is something called “contract manufacturing”. This is the situation where one company manufactures a product on behalf of another, using materials owned and provided by that other company.

In the National Accounts, the company that owns the materials and the output is viewed as the manufacturer, while company doing the production is providing services as a contract manufacturer.

Where this happens across international boundaries, manufacturing activity undertaken outside a country can still be counted towards its GDP.

So far, we have talked about output: what the economy is producing. But the challenges of globalisation and weightlessness also affect business inputs. Economics talks about the factors of production being land, labour and capital, and in the last of those items we are seeing a similar move to weightlessness.

In their recent book Capitalism without Capital Jonathan Haskel and Stian Westlake discuss the growth of intangible capital. Traditionally, capital has conjured up the image of the machinery needed to turn out the goods we consume.

This is changing radically and Haskel and Westlake show that for some modern economies the most important form of capital is not the hard, physical type, but instead is intangible. This term covers a range of assets such as research & development and branding.

Just as with services, these weightless assets can be difficult to measure. For many intangible assets, there are no markets and so no prices with which to value them.

Nonetheless, our estimates show that intangible assets are very important for the UK: investment in intangible assets was around £135bn in 2015 compared with just over £140bn for tangible assets.

There is parallel with the trade in services as intangible assets such as intellectual property can be moved between legal entities around the globe.

When that intellectual property is relocated, so are the flows of royalties and depreciation that go with it. A company can choose to relocate its intangible capital and the assets and income will flow through the new country’s National Accounts. It was a combination of relocating intellectual property and contract manufacturing that led to the 26 per cent rise in Ireland’s GDP reported in 2016.

The three phenomena of weightlessness, intangibility and globalisation are having profound effects on our economy and our statistics.

At the Office for National Statistics we are working to develop the methods to measure these new features of our economy. Last year we established our Economic Statistics Centre of Excellence to help us with these challenges.

We are improving our measure of services, developing a more complete picture of intangibles and developing stronger approaches to measuring the sharing economy. At the same time, we are making sure we have a stronger understanding of businesses to ensure we are alive to how globalisation can rapidly change economic activity.

Jonathan Athow is the Deputy National Statistician at the Office for National Statistics