Some welcome news from UK GDP but is inflation really 6.1%?

by Shaun Richards

Today has brought us up to date on the performance of the UK economy in 2020 and we can start with some welcome good news.

Real gross domestic product (GDP) increased by 1.2% in December 2020, following a revised 2.3% decline in November, when there were more extensive restrictions to activity. During December, a period of eased restrictions early in the month was followed by tighter restrictions to activity across all four nations of the UK later in the month.

So we open with good news for December which was a fair bit better than expected as well. As an aside I do wonder why places bother with expectations as in 2020 in archery terms they would not only have missed the target but any crowd would in danger.

One reason for a better December was that the economy has adjusted to the lockdown/restrictions era. From our Deputy National Statistician.

Both manufacturing and construction saw strong growth in the last few months of 2020. In December car manufacturing etc. exceeded its February 2020 level. This is likely due to businesses adapting their operations to allow for social distancing and putting in place other measures to prevent the spread of the virus. Economies adapt to changing circumstances, but that can involve costs.

So we saw a lot of variation but also some adaptation. Furthermore the growth in December combined with a minor upwards revision for November meant that the annual comparison was better than feared by some.

December GDP is 6.3% below the levels seen in February 2020; this compares with 7.4% below pre-pandemic levels in November 2020.

There was a welcome return to form for an area that is usually the strength of the UK economy.

The services sector acted as the main contribution to growth in December, increasing by 1.7% as a number of consuming facing industries reopened following the easing of restrictions in December, as well as strong growth in health (with the strongest contributions coming from the coronavirus testing and tracing schemes). The services sector is now 6.9% below the level of February 2020.

I can vouch for some of that as for example the film trailers and indeed some filming were back in Battersea Park. However it remained an under-performer relatively.

The production sector grew marginally by 0.2% in December 2020, and is now 3.6% below its February 2020 level………. The construction sector is now 3.5% below the level of February 2020.

For those of you wondering whether there was some pre end of the Brexit transition period stockpiling? Well sadly we are none the wiser. From our Deputy National Statistician.

There are a number of challenges in measuring stockpiling. 2020 was such an unusual year meaning that normal seasonal stockpiling patterns might have been distorted. There was also some disruption at the UK border in December too. So difficult to draw firm conclusions.

The Quarterly Picture

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We can get more of  perspective from the quarterly numbers which are more of an international standard. The monthly ones are welcome in terms of more data but I have my doubts about their reliability. However the numbers are at least consistent as we get another welcome rise.

UK gross domestic product (GDP) in Quarter 4 (Oct to Dec) 2020 is estimated to have grown by 1.0%, following revised 16.1% growth in Quarter 3.

The growth was widespread.

In Quarter 4 2020, there have been increases in services, production and construction output, although the output of these industries remained below their Quarter 4 2019 (pre-pandemic) levels.

However regular readers will be aware of an issue that I pointed out back in August. That is the issue of the UK Office for National Statistics choosing to measure health and education GDP on an output basis rather than the international standard of income. This matters because for the same events in 2020 we would report lower GDP. Regular readers will recall that this was highlighted by us recording 32.7% inflation via the GDP Deflator in the second quarter of last year. Well there is still an issue as we are told there is little or no inflation which seems to have morphed into, well you can see for yourselves!

Compared with the same quarter a year ago, the implied GDP deflator increased by 6.1%.

Test and Trace Problems

This is not what you think but it does raise an issue of consistency and the emphasis is mine.

Growth in Quarter 4 was mainly driven by increases in the health and education industries. Health experienced an increase of 12.4%, mainly because of the coronavirus testing and tracing schemes across the UK. Meanwhile, education increased by 5.6%, reflecting higher levels of school attendance in Quarter 4.

Okay so for followers of the story we have a partial correction of the issue in the second quarter where the UK recorded a plunge in GDP ( the gap between nominal and real GDP was of the order of 5%). But whilst education is clear-cut the health bit has a kicker so let us take a look.

Nominal government consumption in health increased by 17.2% in Quarter 4. This has been partly reflected in a volume increase of healthcare services, mainly because of the coronavirus testing and tracing schemes.

So there has been a correction of sorts but rather than a rethink it looks to be rather ersatz or if you prefer a fudge.

We have therefore added testing and tracing adjustments to our volume measure of £200 million in Quarter 2 (April to June) 2020, £1 billion in Quarter 3 2020 and £4.5 billion in Quarter 4. These very approximate initial adjustments are informed by the available in-year spending data for testing and tracing for the period April to September 2020.

So we have situation where having come under fire for their behaviour in the second quarter our statisticians have in fact abandoned their approach for one section and effectively pretty much put the income numbers in. There is quite an irony as the Test and Trace problem is a disputed area and we could spend all day on it alone. Suffice to say that I do not think anyone would give it an output rate of 100%, which sadly I have to report is if you think about it yet another critique of the ONS approach here.

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In fact they seem to be running things on an ad hoc basis and trying to correct what they did by lobbing in a few pretty random numbers.

Smaller adjustments have been made to the health industry in the output approach to GDP, reflecting evidence that some of this activity is already recorded in private sector manufacturing and services. In Quarter 4 this adjustment was £3.75 billion.

I welcome the change in the sense that we are nearer an accurate reflection ( or if accurate is too strong at least an internationally comparable one) of the state of play. But it is a mess no doubt driven by some a strongly worded letter or two from the modern version of the apocryphal civil servant Sir Humphrey Appleby. Regular readers will recall this is similar to the fudge a few years back when a large company was shifted from the services sector to construction to “fix” another mess there.


There is a lot to get through so let me start with where we stand.

Despite two consecutive quarters of growth, the level of GDP in the UK is 7.8% below its Quarter 4 2019 level.

That improved to 6.3% below in December which means that the year as a whole is recorded like this.

Over the year 2020 as a whole, GDP contracted by 9.9%, marking the largest annual fall in UK GDP on record.

I see the media majoring on this but sadly they are ignoring the education and heath issues in the second quarter which made us look worse than others. Also whilst I welcome an attempt to correct this the truth is that it is fudged rather than logical and thought out.

Let me finish with some possible good news for the year ahead from the Bank of England’s Chief Economist Andy Haldane.

BoE’s Haldane predicts that by end of June households will have amassed ‘accidental savings’ adding up to a colossal £250 bln – Daily Mail ( @FinancialJuice )

That could lead to a few surges. I have omitted his forecast of double-digits growth because if I recall correctly according to him we should have that now. So he is like a man buying a lottery ticket every week.

Oh and my rule of OBR Club – the first rule of OBR Club is that it is always wrong – has had another stormer.


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