The ONS has published its much anticipated GDP revisions today for the period between 1997 to Q2 2014. The revisions bring ONS methodology of calculating GDP in line with European standards, which include spending in the black economy (drugs and prostitution) and treats expenditure on intangibles such as research & development as capital investment.
Today’s revisions follow those published on 3 September which covered the period 1997 to 2012. Similar to the previous release, the methodological changes show that the recession was less severe and the recovery stronger than previously thought. In detail:
- GDP was above its pre-recession peak by Q3 2013 rather than mid-2014.
- The peak to trough fall during the recession is now estimated at -6.0% compared to -7.2%.
- Annual nominal GDP level revised up by a little over £53bn (4.1%) on average for 1997 to 2013.
- Between Q2 2013 and Q2 2014 real GDP increased by 3.2% - GDP now 2.7% higher than pre-economic downturn.
- Real GDP growth between Q1 2014 and Q2 2014 revised up by 0.1% to 0.9%.
- Real GDP per capita remains 1.8% below its Q1 2008 level in Q2 2014.
Total production output grew by 0.2% in Q2 2014 compared with Q1 2014
- Manufacturing output rose by 0.5% in Q2 2014 – the largest upwards contribution to production growth.
Between Q2 2013 and Q2 2014 household final consumption expenditure rose by 2.1%.
Between Q2 2013 and Q2 2014 gross fixed capital formation rose by 9.1%.
The trade deficit increased by £0.2bn between Q1 and Q2 2014 – exports fell by 0.4% and imports by 0.3%.
What do they mean?
We know that the UK economy has been performing better than previously thought; the drop in output was smaller during the downturn (still the worst since records began in 1948) and its rise steeper in the recovery (still relatively slow). But what are the implications of this?
The revisions are not trend-breaking and should not fundamentally alter the macroeconomic picture. For certain, UK citizens did not wake up this morning with more money in their pockets neither is the recovery sufficiently more balanced nor the deficit narrower.
By and large, what these revisions mean are that the supply capacity of the economy was less damaged by the recession than initially expected. This should imply a smaller output gap and could account for part of the labour ‘productivity puzzle’. With employment figures (and hours worked) unchanged, higher output should translate to better productivity figures. Still, output per hour in Q1 2014 remains 16% compared to the previous estimate of 19% below its projected path had the pre-recession growth rate been maintained. This shows that the revisions do little to explain the 'puzzle'.
The most direct implication of these revisions is for the BoE’s interest rate decision. A stronger recovery and less spare capacity could raise the momentum for a hike in November. However, key indicators of spare capacity – inflation and wages – remain subdued, meaning that the revisions do not substantially affect inputs to the interest rate decision.
Is it all good news?
There is a potential downside to the revisions too. In terms of fiscal policy, the fact that the deficit has remained so hefty despite stronger underlying growth is worrying. If robust GDP growth has failed to narrow the deficit this could suggest that the structural element of the deficit is deeper or that the composition of GDP growth is problematic.
The latter brings to mind the rebalancing argument – the composition of growth has until recently been heavily tilted on the consumption side. In this respect, perhaps the most encouraging aspect of this release is the positive figures on investment – up 9.1% in the last quarter.
Investment is crucial for rebalancing and so is manufacturing. Manufacturing output grew by 0.5% from Q1 to Q2 2014 providing the largest upward contribution to production growth – in line with EEF expectations. This failed to boost exports however, which fell by 0.5% widening the trade deficit by a further £2bn on quarter.
Rebalancing the economy is still some way off and the upward revisions on GDP should not cause complacency. Public finances remain precarious, wages are flat lining, exports are struggling and so is productivity. These economic facts should be enough to occupy the agendas of policy-makers in the run up to the General election.