UK GDP has been distorted by the way we measure Health, Education and Trade

by Shaun Richards

We have the opportunity to look at what is good news and to see that many of our themes have some true again.

UK gross domestic product (GDP) is estimated to have fallen by 2.9% in January 2021, as government restrictions reduced economic activity…………January’s GDP was 9.0% below the levels seen in February 2020, compared with 4.0% below October 2020 (the initial recovery peak).

Care is needed as of course this is still an economic depression with an 9% decline since pre pandemic. However the lockdown this time around has had a much smaller impact than last time meaning there is more hope for the recovery.In terms of our themes then we see that the “expert” forecasters were wrong again as they were expecting something like -5% on a monthly basis and yes the first rule of OBR Club ( that it is always wrong) has had yet another good day.

Should February and March follow a similar pattern then there is genuine hope that the Bank of England is wrong too.

GDP is expected to fall by around 4% in 2021 Q1, in contrast to expectations of a rise in the November Report.

This leads to this according to Alpesh Paleja of the CBI.

Worth noting that even if GDP is flat in Feb and March, the decline over the quarter will “only” be 1.3% – much smaller than analysts were expecting (initial estimates were for a decline of 3-4% in Q1 2021).

If so the forecasts will have been out by quite a bit and we will be on a much better trajectory. The caveat as ever is that the monthly numbers can be erratic and we do not know February and March yet.

The Breakdown

We see two by now familiar patterns in the numbers.

Falls in consumer-facing services industries and education drove a contraction of 3.5% in the services sector in January 2021.

We see that declines through this phase are invariably led by the services sector and we see that the UK quirk in terms of measuring education is back. This pattern repeats if we look at the annual comparison.

The services sector was 10.2% below the level of February 2020 compared with 4.9% below the level seen in October 2020.

We can break this down into the various areas.

The service sector saw falls in 9 of the 14 sub-sectors between December 2020 and January 2021. The largest contributor to the fall was wholesale and retail trade, followed by education services, accommodation and food service activities, and other service activities such as hairdressing, because of the reintroduction of restrictions across the UK. There was growth in five sub-sectors, most notably in health activities, and information and communication services.

Of the 3.5% fall in the service sector some 1% was the retail and wholesale trade sector which is hardly a surprise in a lockdown. Also an issue I was the first to raise back on August 12th last year has returned. By this I mean education which reduced services output by 0.94% so let me explain the issue.

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Health and Education

This is an area where the UK has chosen to measure GDP differently from elsewhere as we measure what is output whereas pretty much everywhere else matters inputs. So when the pandemic hit other countries recorded higher GDP from higher wages, overtime etc in the health sector whereas we noted some areas closing and thereby reduced output. We did so by an arcane method which was deciding inflation could take the slack and set the deflator for this area at 32% for one quarter.

Education was recorded as having lower output due to it switching from physical teaching to online. Whereas abroad it was regarded as pretty much unchanged and the same has  just happened.

The education sector contracted by 16.3% in January 2021; the second largest contributor to the monthly decline. While remote learning activities are included for the education sector, the estimated output from these is lower than pre-pandemic classroom-based learning, as described in our School’s Out: measuring education output in the summer of the pandemic blog post.

I have left in the hyperlink as our statisticians have been poor in explaining this so I welcome any effort to do so. But if we do a back of the envelope calculation we see that there was a 0.7% fall in UK GDP in January due to this.

Just when you thought that might be enough there is something else to factor in and we are back to health.

Health had a large contribution to growth in January 2021, increasing by 8.7%, mainly through coronavirus testing and tracing and vaccine schemes across the UK. Adjustments for these programmes increased overall GDP by 0.9 percentage points in January 2021; some of these adjustments are in other industries than health.

You see after proclaiming we are using outputs we have switched to inputs/expenditure.

These very approximate initial estimates are informed by available in-year spending data for testing and tracing; the available estimated cost to secure and manufacture vaccines for the UK and deploy vaccines in England; available testing and vaccination data and estimated imports.

If there is any output measure here that is in another new section which is vaccines.

The January adjustment across all industries for vaccines, in volume terms, is £400 million, and for testing and tracing is £3,200 million. The equivalent total December 2020 combined adjustment for vaccines, and testing and tracing was £2,200 million.

I can vouch to some extent for the vaccine side of the argument as I had my first dose ( AstraZeneca) yesterday so I guess I will be a small part of the March figures. But if we return to the Test and Trace situation we see that we are counting an expenditure or income number in something of an inconsistency or if you prefer type of U-Turn.

Trade

This is something which has caused a minor furore on Twitter so let me start with why. This is what is being reported.

The ONS #Brexit trade stats are ugly, even allowing for December stockpiling & “teething problems” – exports to EU down 40.7% – exports to Ireland off 47% – imports from EU off 28.8% No similar falls with rest of world via @ChrisGiles_

This is from Peter Foster of the Financial Times and one might on GDP day take that to mean the UK has seen a substantial GDP fall. But the opening swerve is the use of percentages because actual numbers give a different picture.

Exports of goods, excluding non-monetary gold and other precious metals, fell by £5.3 billion (19.3%) in January 2021, because of a £5.6 billion (40.7%) fall in exports to the EU……..Imports of goods, excluding non-monetary gold and other precious metals, fell by £8.9 billion (21.6%) in January 2021, driven by a £6.6 billion (28.8%) fall in imports from the EU.

So as net trade goes into the expenditure version of GDP we see that EU trade boosted GDP by £1 billion and overall trade boosted it by £3.6 billion.

Care is needed as we also need to factor in the important services sector.

The trade in services surplus widened by £0.1 billion to £8.2 billion in the month of January. Imports fell £0.3 billion (2.4%) to £10.7 billion and exports fell £0.2 billion (0.9%) to £18.9 billion.

As you can see that changes the picture little.

Comment

The conclusion is that these are good numbers and put the UK on a better trajectory than we were told which has become a consistent theme. Care is needed with that as it means we have less of a depression than before but unnecessary gloom ( with the OBR to the fore) does not help.

Under the surface there are some big issues going on and two major ones relate to health and education. When back on August 12th I pointed out the issue it was health that seemed bizarre.

I helped Pete Comley with his book on inflation a few years ago with some technical advice and proof reading. I recall him telling me that he had looked into the deflator for the government sector and had discovered they pretty much make it up.

Bringing that up to date I have spoken to some physio’s who have been deployed to Covid wards and another who when returning to her normal role found all the PPE fogged up her glasses so it was very difficult to treat a patient. So it is complex and therefore a time for producing numbers which are internationally comparable.

Now education GDP has been hit again and the methodology has been dropped and in an irony for something about which many would argue has had issues with its output. Step forwards the “Test and Trace” system. On the other hand putting in the vaccines seems much more sensible.

“Contrariwise,” continued Tweedledee, “if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.” ( Alice In Wonderland)

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