Adding sex and drugs to economy helps pull UK out of recession early

The recession was shallower and the recovery stronger than previously thought, according to sweeping revisions to GDP from the Office for National Statistics released yesterday.

The statistical changes will feed into the Bank of England’s increasingly heated deliberations over the appropriate timing of interest rate rises and also the political battle over the Coalition’s handling of economy ahead of next year’s general election.

The ONS’s data showed that from its peak in the first quarter of 2008 to the trough in the second quarter of 2009 Britain’s GDP fell by 6 per cent, less than the 7.2 per cent previously estimated. The data also showed that GDP grew by 4.7 per cent in the subsequent 14 quarters, up from the 3.4 per cent earlier estimate.

The figures hold out the possibility that UK output returned to its pre-crisis peak in the third quarter of 2013, almost a year earlier than previously thought.

The Treasury welcomed the figures, with officials pointing out that if the post 2012 growth rates are applied to the data the UK has now grown by 8.1 per cent since the first quarter of 2010, more than Germany over the same period and the third highest growth rate in the G7.

However, Labour said that the revisions did not mean families or businesses are any better off than before. “It’s still the case that working people are substantially worse off under this Government, that the recovery was choked off in 2010 and that it is the slowest on record” said Chris Leslie, Labour’s shadow Chief Secretary to the Treasury.

A similar message came from the ONS itself, which said that the changes did not significantly change the picture of the economy’s performance since the recession. “Although the downturn was less deep than previously estimated and subsequent growth stronger, it remains the case that the UK experienced the deepest recession since ONS records began in 1948 and the subsequent recovery has been unusually slow” said the chief economics Joe Grice.

Some analysts said the faster growth could persuade the Bank of England’s Monetary Policy Committee to put up interest rates earlier rather than later. Michael Saunders of Citigroup said growth in the period after 2012 was also ultimately likely to be revised up. “This would imply a higher growth outlook, and hence also indicate that slack probably should continue to shrink rapidly. All this would tend to make the MPC more likely to hike earlier rather than later” he said.

The revisions reflect the ONS’s incorporation a new pan-European statistical accounting method known as ESA 2010. Among a host of technical changes, this adds statisticians’ estimates of black market activity such as prostitution and illegal drug sales to GDP. It also classifies research and development spending by firms as output rather than consumption.

The impact is to lift the level of nominal GDP at the end of 2012 by £21bn.

How do you measure prostitution?

The ONS used data from the Metropolitan Police on the number of street prostitutes in London. They worked out the number of prostitutes per head of population in the capital and then scaled this up to create a national figure for the UK. Then, using academic studies, they calculated the average number of clients seen by each prostitute every year, the number of weeks worked and the payment per client.

Putting this together they were able to come up with an output figure. Finally they calculated the average overhead costs of prostitutes, and subtracted it from the output figure to come up with the gross value added of the prostitution sector.