The UK economy and GDP surpass pre pandemic levels

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by Shaun Richards

In these troubled economic times it is always nice to have some better news to report. This morning that has been provided by the Office for National Statistics in the UK.

Monthly real gross domestic product (GDP) is estimated to have grown by 0.9% in November 2021, compared with a 0.2% increase in October 2021 (revised from 0.1%).

We were expecting growth in November but not that strong a level and we were also expecting to get right back where we started from to quote Maxine Nightingale and indeed we did.

In November 2021, GDP is estimated to be above its pre-coronavirus (COVID-19) pandemic level (February 2020) for the first time, by 0.7%.

So we were ahead of the pre pandemic levels for the first time and if we were reporting a quarterly number it too would be strong.

Overall, GDP grew by 1.1% in the three months to November 2021, reflecting the strong performance of the services sector. Administrative and support service activities, human health and social work activities and transport and storage were the three largest contributors to the services sector growth.

As to the quarterly level we will produce in a month’s time it will require something -0.2% or better for December GDP.

If there are no other data revisions, quarterly GDP for Quarter 4 (Oct to Dec) 2021 will either reach or surpass its pre-coronavirus level (Quarter 4 2019), provided our monthly December 2021 estimate does not fall by more than 0.2%.

On an initial view that looks likely to be a no due to the impact on the hospitality industry of the Omicron variant but there will be a boost from the vaccine booster campaign plus the Test and Trace programme.

Before I move on there is the first rule of OBR Club in play. You do not need to take my word for it as here is the economics editor of the Financial Times Chris Giles.

UK economy was bigger than pre-pandemic level in November – much earlier than forecasters (like OBR, who were, if you remember, using the wrong data) expected.

Also the New Year 2021 forecasts submitted to the FT not only missed the bullseye they missed the target completely.

A survey of nearly 100 economists revealed that most of them expect the size of the economy not to return to pre-pandemic levels until the third quarter of 2022, despite the expectation of a strong consumer-led rebound from the rollout of the coronavirus vaccine.

What happened in November?

We can start with noting what is a return to more normal behaviour for the UK economy.

There was an increase in output in all sectors in November 2021, with services output the main driver of GDP growth, contributing 0.5 percentage points.

Which leads to services having recovered after a period when they were a laggard.

Services and construction are both 1.3% above their pre-coronavirus levels but production remains 2.6% below.

Services

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We can break this down because whilst the overall position has improved but that there have been a lot of changes in the structure.

Services output grew by 0.7% in November 2021……. At the services sub-sector level, 8 of the 14 have surpassed their pre-coronavirus levels, with the largest contributions from human health and social work activities, wholesale and retail trade, and arts, entertainment and recreation.

The leader of the growth pack is below.

Professional, scientific, and technical activities grew by 2.5% in November 2021 and was the main contributor to November’s growth in services . The main driver of the growth in this sector was architectural and engineering activities; technical testing and analysis, which grew by 6.2%, with anecdotal evidence of work brought forward from year end.

The next category looks to be a sign of a structural shift in the economy ( away from high street retail) which is ongoing.

Transport and storage grew by 3.8% and was the second largest contributor to November’s growth in services. The main drivers of this growth were postal and courier activities (growing by 8.0%) and warehousing and support activities for transportation (growing by 3.3%).

Another growth area is below.

Output in consumer-facing services grew by 0.8% in November 2021, mainly driven by a 1.4% increase in retail trade.

There has been a clear structural shift here.

Consumer-facing services are 5.0% below their pre-coronavirus levels (February 2020) in November 2021, while all other services are 2.9% above them.

On the other side of the coin here are some of the fallers.

Downward contributions to services growth in November 2021 included a 0.1% fall in real estate activities and a 0.3% fall in public administration and defence.

Health

As we expected there was an upwards push from this area in November.

The NHS Test and Trace and COVID-19 vaccination programme had a positive 0.2 percentage point impact on gross domestic product (GDP) growth in November 2021, with NHS Test and Trace and vaccination programmes both increasing (by 2% and 40% respectively)

As I have written before I have much more faith in the value of the vaccine programme. However several of my friends have found the ability to test useful and are very enthusiastic about it. So I should up rate my view of it a bit.

Production

We can start with some good news here too.

Production output increased by 1.0% in November 2021, with a mixed performance across the four sectors.

There was also a welcome hint of an improvement in the supply chain problems we have been seeing.

Manufacturing was the largest contributor to production growth in November 2021, increasing by 1.1%, with positive growth in 9 out of the 13 manufacturing sub-sectors…….After two months of contraction, output in the manufacture of motor vehicles increased by 7.8% with anecdotal evidence around improvements to the sourcing of parts, although other businesses in this industry noted a continued supply shortage.

But the overall picture remains problematic.

Production is 2.6% below its pre-coronavirus (COVID-19) pandemic level (February 2020), predominately driven by manufacturing, which is 2.2% below its pre-coronavirus level.

There is a curiousity here because there has been a debate about water quality in UK rivers and the like but the GDP stats tell us this.

Water supply and sewerage is the only production sub-sector above the pre-coronavirus level (7.6%).

Construction

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There was apparently strong growth here too.

Construction output increased 3.5% in November 2021 following a fall of 1.7% in October 2021 (revised from a 1.8% fall). This is the largest monthly rise seen in construction output growth since March 2021 (4.5%). Construction output is now 1.3% above its pre-coronavirus (COVID-19) pandemic level.

However it leads to a different result as the sector has now grown.

As ever care is needed with this sector as there are wild swings and it the numbers had problems in more settled times.

Comment

There is the good news we were expecting which is exceeding pre pandemic levels of economic output and in fact by more than we thought. December will be tougher due to the travails of the hospitality industry but may get as much as a 0.4% boost(er) from the heath sector.

We can now move on to a point I regularly make which is the unreliability of the monthly numbers which the pandemic has exacerbated. Since the last monthly numbers March as been revised up by 0.7% and June lower by 0.5%. So whilst such revisions would not change the overall picture reductions of that sort of size could mean we have just regained the previous peak.

Also there looks to have been quite a shift in UK goods trade in 2021. Here is Thomas Sampson of the LSE.

Gap between EU and non-EU imports widened further in November EU imports down 30% relative to non-EU imports since start of 2021 Suggests TCA has had large negative effect on imports from EU.

Whereas exports have been affected much less.

On other hand, exports to EU and non-EU have performed similarly in 2021. Both around 10% below pre-Covid levels, but no compelling evidence that TCA has led to persistent reduction in exports to EU so far.

So there has also been a shift in the pattern of trade which is likely to be Brexit influenced. There will also be an effect as time passes from the higher energy prices we have been seeing.

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