Last week, the Office of National Statistics (ONS) revised its figures for the UK economic activity for the period 2018-2021. Headlines celebrated this revision that showed by the end of 2021, rather than economic activity (measured by GDP – Gross Domestic Product) being 1.2% below pre-pandemic levels, it had actually recovered to 0.6% above. In other words, the UK’s economic recovery from the pandemic and associated social controls (lockdown) was quicker than had been previously thought.
Such revisions are not unusual. The ONS continues to collect data on past economic performance from a range of sources, including tax returns, and often revises its initial estimates of the UK’s economic performance.
Leaving aside whether GDP is a good measure of how well the UK is doing, the detail of the data revisions reveals some more complex economic issues.
The revisions in more detail
Chancellor Jeremy Hunt and other commentators were right to observe that the data suggests the UK was no longer an outlier in the slowness of its economic recovery from the pandemic. Its performance now sits well within the range of major global economies (the members of the G7). However, what has been lost sight of is that the improvement is an overall average.
When we look at the detail of the revisions, we can see significant variation. So for instance, in the earlier figures, in the period 2018-2021, the retail sector (excluding the motor trade) had only grown by less than 1%; in the revised figures retail had grown by over 3.5%.
Interestingly, the repair (not sales) of cars and motorcycles has also been revised upwards from below 0.5% growth to over 2.5% for the same period.
But as the overall figure is an average, unfortunately, other revisions are downwards. So, the figure for post-Brexit agricultural production in the original figures from 2016 had shown an expansion of 11.7%. Now, after revision, the agricultural sector’s production has actually declined by 7%.
Even larger, the revision to the figures for basic iron and steel manufacturing, show a shift from a growth of 56% in the period 2018-2021, to a decline in the same period of 66%.
Looking at the range of data revisions reported by the ONS overall, it is clear is that while services growth had been underestimated, the original version of the reported figures had over-estimated production growth for manufacturing, agriculture and other industries such as oil and gas extraction or construction.
A changing narrative?
Much has been made in the media about how the revisions change the narrative of the UK economy. However, the overall picture of an economy struggling remains. The revised performance is hardly world-beating, nor generating any increases in widened prosperity. But these revisions do tell us some interesting things about the current plight of the UK economy.
One of the reasons the ONS has given for the shape of the revisions is that detailed data has enabled them to more clearly see where value is being added in the UK’s economic activity. GDP is not a figure for turnover or volume of activity, but rather is intended to measure the amount of value added through economic activity and production – which for individual firms or groups of workers, is usually referred to as productivity.
The ONS has discovered that in various economic interactions, value has been added at a different point in the process from that which had been presumed on the initial figures. For instance the ONS has now found that more value is added in iron and steel manufacture from the supply of energy, than from the manufacture of the iron or steel itself. In other words, the new data has led the ONS to conclude that productivity is comparatively higher in energy production and distribution than in iron and steel plants.
More generally, as the shift is to higher figures for services and lower figures for material activities, it seems likely that the ONS has been under-recognising productivity advances in services. These may be due to shifts in working practices or the deployment of new technologies in service sector firms. Given the domination of services in the UK economy, this may be good news for discussion of the UK’s productivity problem, as increasing service sector productivity is frequently seen as a challenge.
If some of the general decline in manufacturing and agricultural data has been due to a shift in where value is added, it is also quite possible that some of the decline in value added has been the result of the restraints on activity caused by leaving the EU.
Exports add to GDP and imports reduce it, so the reduction in GDP across a range of material-based sectors seems to confirm that the UK’s international trade performance from non-services sectors continue to deteriorate. This may be due to the disruption of the flow of goods with our primary external market; the EU. We now may be exporting less in relation to our continued dependence on imports.
Why might narratives like these be important?
The reason that many have been quick to grab onto the growth in the average figures in the ONS revisions reflects two key factors; one political, the other economic.
It is unsurprising that as we head towards an election, the party in power and the prime minister want to emphasise an improved story of growth as part of his ‘five pledges’. It is a widely held view that governments lose elections when the economy is perceived as being in decline. As the current Government is polling pretty badly, Rushi Sunak was very eager to celebrate this change in the economic story of the last three years, and who can blame him?
But, also in economic terms, individuals’ market and economic activity is at least partly shaped by the general story of the economy. We experience inflation quite directly, but the overall success of the economy is much less easy to judge on an individual basis and so we rely on narratives. These may appear in the press, in society via social media, or may be articulated by politicians or others who have gained our attention.
The idea that we can ‘talk ourselves into a recession’ is one way this idea has appeared in the discussions of the UK’s economic performance. If we believe a recession is imminent, and we fear for our jobs or our business, we may reign back future-oriented expenditure in expectation that times are about to get harder. But by doing this, and lowering levels of economic activity, a recession may become more likely as a result.
Therefore, the idea that the UK is doing better than we have thought, may have some impact on the current low levels of investment, by shifting investors’ views about the likelihood of any investment being successful. In this sense, an improvement of the narrative of the UK’s performance may encourage a virtuous cycle of renewed investment – which the UK very much needs.
In the end, after the ONS revisions, much about the UK’s economy remains the same, but what we have also seen is that the figures indicate that the UK’s economy continues to shift and change. The revisions reinforce the evidence for the continued rise of service sector, but also offer some evidence of the changes in the UK’s external economic relations prompted by Brexit.
Finally they suggest that one reason for the UK’s poor investment performance may be that while the economy’s overall performance has been under-stated, to investors aware of real performance on the ground, manufacturing’s (now revealed) under-performance is also clearer.
Together, this has helped to produce a resistance to invest which has patterned the last few years in the UK.