Artist's impression of an ONS economics wizard
At the end of September, once you’re back from your holidays and the kids are back at school, the Office for National Statistics (ONS) is going to perform a bit of statistical magic for us. It is going to show that the level of the UK's Gross Domestic Product is higher than we thought it was, the recession in 2009 wasn’t as deep as we assumed, and that the last peak in the economy in the first quarter of 2008 was surpassed in the first three months of 2014. This major overhaul in the way we calculate GDP is going to be unequivocally good news in some respects, and it might even reveal that our productivity funk hasn’t been as abysmal as it is estimated to be. But don’t reach for the bunting quite yet—even the ONS can’t magic away deep-seated concerns about our economic predicament and prospects. If anything, it might just make a rise in interest rates more likely.
The ONS makes revisions to the way we perceive the economy fairly regularly, if not frequently, in the light of fuller and better information. This time it is also introducing statistical measurement techniques that conform to the European System of Accounts 2010. The updated accounting system tries to incorporate some of the substantial changes that have impacted economies. For example, it takes into account the increasing role of information and communications technology in production processes, and the growing importance of intangible assets such as intellectual property products and services. Research and development by companies, regarded as a cost until now, will be treated as investment, as will weapons systems. New estimates will be made about the contributions of insurance services, charities and illegal or ‘borderline’ economic activities, such as drugs and prostitution to the economy. Changes to the valuation and measurement of pensions will also be introduced, raising the level of household savings.
While the pattern of growth between 1998 and 2009 will look different, with some years revised up, and some down, the overall growth in the UK economy over the period will be unrevised at 2.2 per cent per year. The headlines, however, will focus on how this new reporting system and revisions change our view of what’s happened to us. They will show that GDP growth in 2007, just before the financial crisis, was rather more pedestrian than we thought, that is about 1 per cent lower at 2.4 per cent. They will also show that in 2009, the worst recession since 1945 was still the worst recession but GDP fell by 1 per cent less than we thought, that is by 4.1 per cent, rather than 5.2 per cent. What this means is that the recovery since that time has actually taken the economy above its previous 2008 peak sooner than we thought, that is, in the first quarter of this year. And it might even have happened earlier still once we know the ONS view about GDP between the years 2010-2012.
Moreover, the ONS data may help to shed a little more light on one of the more important issues in the UK economy in recent years; the curious case of the country’s productivity slump. It is estimated that productivity is about 16 per cent lower today than it would have been had the pre-2008 trend persisted—a crucial reason behind the stagnation or fall in living standards for many people. However, emphasis should be on the word "little," since even if output is revised higher, the impact on productivity is unlikely to be substantial. It is thought that the level of productivity could also be revised up by 2-3 per cent, leaving a still large, and mostly unexplained gap relative to the trend.
Whether we can close this gap, and how long it might take, is of huge importance to the economy, people's well-being, and the policy decisions on interest rates being considered by the Bank of England’s Monetary Policy Committee this summer. If economic output per worker—productivity—remains low, then this might encourage the Bank of England to increase interest rates, since we might run into capacity limits earlier. Unemployment has already fallen a good deal further and faster than the Bank had expected. On the other hand, if productivity growth speeds up considerably, we could get more output without running into price pressures.
Unfortunately, there is no scientific or certain knowledge to help the Bank or the rest of us know. In an interesting speech recently, one of the MPC’s external members, Ian McAfferty, highlighted some research he had concluded in which he estimated that 40 per cent of the UK’s productivity shortfall may have been due to weak demand in the economy, and therefore technically recoverable, but that 60 per cent was entrenched in structural form in the economy, and therefore unlikely to go away. He identified the bulk of the problem in a small number of sectors, including oil and gas extraction, financial services, warehousing, education and postal and courier services, and he attributed weak productivity performance to a combination of stronger regulation in financial services, construction, the environment and security, changes in the way banks and other service industries worked, more difficult trading conditions, and labour retention.
To the extent the problems in these sectors don’t change much, or only slowly, the chances of a robust productivity turnaround would appear to be rather slim. The implication, then, is that the Bank might well be inclined to start the normalisation of interest rates in the autumn, even if the pace might remain moderate for the time being. The ONS statistical magic will be an interesting rear-view mirror exercise, and may help us to capture economic growth better in the future, but it won’t change the pertinent economic issues of the day.
