UK GDP is revised higher but stagflation is on its way

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by Shaun Richards

This morning gives us an opportunity to review the UK economic experience over the pandemic and also to look ahead, as it is the season or at least day for economic growth ( GDP) revisions. In terms of the level the news was good.

The level of GDP is now 1.5% below where it was pre-coronavirus (COVID-19) at Quarter 4 (Oct to Dec) 2019, revised from the previous estimate of 2.1% below, because of upward revisions to growth in 2020;

So we are in terms of the level of GDP some 0.6% better off than we previously thought. The main player here is that 2020 was not as bad as we had thought it was with every quarter revised higher and the last one by 0.4%. That tends to be the nature of sharp economic contractions which is that they get over recorded at the time and then reduced by revisions. The detail shows we know much less about smaller businesses than many try to claim.

We have also incorporated Value Added Tax (VAT) turnover data up to Quarter 2 (Apr to June) 2021 to estimate the output of small businesses for some industries in the output approach to GDP.

It is not only wages for smaller businesses that are missing from the official data. Also my case that we need to have more complete data about services trade gets another boost.

This release includes the processing and GDP balancing of a number of annual benchmark data for 2020, including the annual International Trade in Services Survey.

Anyway this is the good part.

Annual UK GDP in 2020 is now estimated to have fallen by 9.4%, revised from a first quarterly estimate of negative 9.7%.

But whilst the level is good news the speed is not as we slowed as 2021 progressed.

UK gross domestic product (GDP) is estimated to have increased by 1.1% in Quarter 3 (July to Sept) 2021, revised from the first estimate of a 1.3% increase.

At this stage the numbers back up our theme which was that as pre pandemic economic growth was weak then once we got back to previous levels there was a fear that we would return to slow or no growth.

What happened in the third quarter?

In monthly terms we stalled in mid summer.

For the latest quarter, those figures indicate that monthly GDP fell by 0.1% in July, and increased by 0.1% in August and 0.6% in September 2021.

Looking at it in sectoral terms then our largest sector grew by less than we had thought.

There was a rise in services output of 1.4% in Quarter 3 2021, revised down from a first quarterly estimate of 1.6%.

Although growth was weaker than we had thought the problems of measuring this are shown by the revision to an area we now think grew.

Notably, the arts, entertainment and recreation sector has now recovered to above its pre-coronavirus levels by 2.4%, revised from a first estimate of being 5.4% below pre-coronavirus levels.

It is also a sector which of course if being hammered right now.

More curiously we do not seem to have counted what we produced.

Production output fell by 0.1% in Quarter 3 2021, revised down from a rise of 0.8% from the first estimate.

Inflation Problems

This is not what you might think as there is a big problem here.

The implied deflator rose by 0.5% in Quarter 3 2021, revised from a first quarterly estimate rise of 0.2%. Compared with the same quarter a year ago, the implied GDP deflator rose by 0.6%.

So the picture of inflation picking up which is the experience of everyone is contradicted by what is supposed to be this.

The implied GDP deflator represents the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that comprise GDP.

We are back to a point which I have made many times which is that the inclusion of the government sector has blown the numbers up.

This was driven by a rise in the annual household implied deflator of 2.8%, partially offset by a fall of 7.1% in the government implied deflator.

As you can see the household deflator was working but the overall one was torpedoed by the deflator by the government sector. This is quite a fail as our “broadest measure of inflation” has failed to pick up the rise in inflation. Indeed having gone 1.9%, then -1.9% before the 0.5% in the third quarter it has lost the plot.

Health Sector

This has played with the numbers in another way as you can see below.

The consumption of health services fell by 1.6% in Quarter 3 2021, revised down from a first estimate of a rise of 3.4%.

Caused mostly by this.

Revisions were driven by updated data in General Practitioner (GP) services and outpatient follow-up appointments across 2020 and 2021.

In the modern era it is disappointing that we do not know what GP appointments are. Also we see another way that the pandemic has affected our official statistics.

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Trade

This was worse then we had thought.

The UK’s trade balance fell to a deficit of negative 1.9% of GDP in Quarter 3 2021, revised from a first estimate of negative 1.2%.

In volume terms, total exports fell by a revised 3.5% in Quarter 3 2021, driven by downward revisions to goods and services.

This may well have been driven by the supply chain shortages issue.

There was a fall in goods exports of 8.8% in Quarter 3 2021, particularly because of falls in machinery and transport equipment, unspecified goods, and material manufactures.

Within it there was an improvement in the important services sector.

he rise in service exports of 2.7% was driven by financial services, as well as other business services where GDP balancing adjustments have been applied……. Services imports fell by 2.4% in Quarter 3, because of falls in intellectual property.

Comment

We can now bring this up to date. We may well have got right back to where we started from to quote Maxine Nightingale in November. But December is going to show another decline. It is quite clear that the hospitality industry has received what in football would be called a scissor tackle. Not only have people cancelled many bookings but those places with business have been affected by staff having to isolate due to Covid. I expect the next series of these numbers to be worse and maybe much worse.

The percentage of businesses currently fully trading in early December 2021 was 80%, while the percentage partially trading was 12%; this compares with 81% and 11%, respectively, in late November 2021 with the transportation and storage industry reporting the lowest percentage currently trading.

The exact pattern is different for each of the countries as we look forwards to January as restrictions are higher in Scotland and Wales compared to England. But with the energy price crisis getting even more severe the opening of 2022 looks like a time of stagflation with inflation especially to the fore.

 

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