Today has brought some good news for the UK economy but with the kicker that inflation is on the march as well. So let us start with the good news on the economy.
UK gross domestic product (GDP) is estimated to have increased by 1.3% in Quarter 4 (Oct to Dec) 2021, upwardly revised from the first quarterly estimate of a 1.0% increase.
This means that we had pretty much got right back where we started from at the end of 2021.
The level of GDP is now 0.1% below where it was pre-coronavirus (COVID-19) at Quarter 4 2019, revised from the previous estimate of 0.4% below.
Of course there is the issue that such a performance rather leaves us singing along with David Byrne and Talking Heads.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
So the news is welcome but we are now facing more problems which takes us back to the fact that the economic outlook was not so great back at the end of 2019. We do not know what the state of play would have been without the Covid pandemic but we do know that many economies were struggling before it occurred.
In the detail we saw that the issue of debt is not as big a deal as it might be because of this.
Nominal GDP rose by 3.0% in Quarter 4 2021, revised upwards from 1.5%. It is now a revised 5.9% above its Quarter 4 2019 levels.
Around three-quarters of our debt is conventional and nominal so there is plenty of money around for government to pay interest on it.There is the inflation-linked part which is more of an issue and we can switch to that sort of theme by looking at why we had an upwards revision.
Health Output
This was the major player in the change and is an issue I keep signalling.
The rise in government spending in the latest quarter was driven by an increase in health spending of 4.6%, reflecting a rise in the NHS Test and Trace and COVID-19 vaccination programmes, including the booster programme.
You might reasonable think that in an era of incredible IT progress they would know these numbers in short order, but apparently not. For our purposes today we can also look at education.
Education consumption fell by a revised 1.5% in Quarter 4 2021 and is 5.9% below its pre-coronavirus level. The fall in the latest quarter reflects a decrease in student attendance towards the end of Quarter 4.
Okay so they did not know how many students there were? But adding it all up gives quite a change.
In current price terms, government consumption was revised downwards in 2021 to 7.0%. This was partly driven by downward revision to health expenditure. There were also downward revisions to current price expenditure on public administration and defence in 2021.
The Implied Deflator
We have seen the impact that trying to measure health and education output via the theoretically correct but in practice difficult and complicated GDP output series has had before. Regular readers will recall the early pandemic impact of a 33% move in these sectors moving the overall deflator by 6%. This matters because we are assured that this is true.
This deflator represents the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that comprise GDP.
I am questioning this more and more because whilst this may be true.
The implied GDP deflator rose by 1.7% in Quarter 4 2021 (compared with Quarter 3 (July to Sept) 2021), upwardly revised from a first quarterly estimate of 0.6%
So they are noting the pick-up in inflation that was happening it required a revision to do it and the annual figure frankly just looks hard to believe.
Compared with the same quarter a year ago, the implied GDP deflator rose by 1.7%, revised from 0.8%
The issue gets worse as we advance wondering what health and education have done this time? Only to see this.
The quarterly change primarily reflected a revised increase in the implied price of household consumption……. ( and annually) This was mainly driven by the 4.4% increase in the implied price of household consumption.
So this revision has picked up some inflation but we are seeing large swings as they struggle to cope with a changing world.
Spending on household goods and services is 12.7% higher, while transport spending is 15.6% below its pre-coronavirus levels. Household spending on restaurants and hotels has now recovered to above its pre-coronavirus level.
House Prices
Next in our inflation saga comes this from the Nationwide.
“March saw a further acceleration in annual house price growth to 14.3%, the strongest pace of increase since November 2004. Prices rose by 1.1% month-on-month, after taking account of seasonal effects, the eighth consecutive monthly increase.
“The price of a typical UK home climbed to a new record high of £265,312, with prices increasing by over £33,000 in the past year. Prices are now 21% higher than before the pandemic struck in early 2020.
This is very wrong as the miss measurement of inflation has allowed the Bank of England to have a free pass at pumping up house prices and then claiming it has made people better off. This ignores the fact that first-time buyers and those trading up have to pay higher prices and thus face inflation and indeed lots of it. Furthermore some benefit from the bank of mum and dad but others do not so the Bank of England has added to inequality which is also a familiar theme in its behaviour.
As to looking ahead it is amazing really.
The housing market has retained a surprising amount of momentum given the mounting pressure on household budgets and the steady rise in borrowing costs.
It should not be true but somehow it is an even the Nationwide finds it necessary to invent some form of wages fairy.
The continued buoyancy of housing demand may in part be explained by strong labour market conditions. The unemployment rate has continued to trend down in recent months (to 3.9% in the three months to January) from already low levels. Wage growth has accelerated, though it is running below inflation.
Comment
There was also good news for the UK from the trade figures today as we saw some considerable upwards revisions.
Total export volumes rose by a revised 6.9% in Quarter 4 2021, from a first quarterly estimate of 4.9%. The increase was driven by a 9.6% increase in the exports of goods, particularly in unspecified goods, fuels, and chemicals. Service exports increased by 4.0% in Quarter 4 2021, revised from a fall of 1.8%. This quarterly increase reflected a rise in other business services, telecommunications, and intellectual property.
This will have various part of social media looking the other way as they have spent some time saying how bad the numbers are combined with all sorts of new analysis. Also for newer readers unlike what you are told at school and university trade is not explicitly in the GDP release ( it is in the expenditure version).
As some call us a “hairdresser’s economy” these days it was hard not to smile at this.
Other service activities, which includes personal services such as hairdressers, saw a marked upward revision.
Now I would like to pivot back to inflation and the Bank of England and address what was a whinge dressed up as a speech by the absent-minded professor Ben Broadbent yesterday.
Such criticisms, whether justified or not, are par for the course, and may not be that consequential in the grand scheme of things.
Inflation is around treble its target and house prices are flying but Ben seems to think criticism is unfair. Some of this he has harboured for a long time.
But there’s no doubt it happens. In September 2013, the MPC said that a minimum necessary condition for a rise in interest rates was that unemployment should fall below 7%
My first response is thanks for telling us all these years later! But let me give you an example of a clear technical failure which was using the unemployment rate in the first place. Next I am afraid to say is a lie as Governor Carney knew what he was doing.
Similarly, in a speech in July 2015footnote[5], the then-Governor Mark Carney said the “the decision as to when to [start raising interest rates] will likely come into sharper relief around the turn of the year”. This was no more than suggestive…..
This is very much Lilly Allen style ( It’s not me it’s you…). But it gets worse because if he believes the statement below why has he spent the last 9 years or so supporting Forward Guidance on interest-rates?
And because it’s the job of monetary policy to respond to such things, interest rates are also unpredictable.