28th January 2014 by The Harried House Hunter
Today has seen the release of the economic output figures for the UK economy in terms of its Gross Domestic Product for the last quarter of 2013 and hence for the year as a whole. Whilst the numbers are good news as the UK is in a recovery phase I want to examine what they really tell us and how they do not tell us what is often assumed. Let me help out by showing a development that will take place later this year.
The current methodological framework for producing national accounts data (ESA 1995) will be replaced in September 2014 with a new European System of Accounts (ESA 2010).
This seems a harmless enough updating does it not? Well let me get to the meat of the changes.
Recognition that expenditure on research and development has the nature of investment….This will increase EU gross domestic product by around 1.9%.
That is the main change though there are some other more minor changes which mean that the total increase in GDP will be this.
the weighted average impact of 2.4% in Europe
Do you feel better off and wealthier already? If anybody should, it should be readers in the UK who are expected to do better than the average and see an increase of between 3% and 4% at the stroke of a statistician’s pen or perhaps I should say computer mouse.
There is of course plenty of scope for a wry smile at this change which has already taken place in the United States (last July) as we note that many metrics used such as national debt to GDP ratios will be improved. How convenient! There is of course the issue of telling everyone they are better off just at a time when the going is tough with falling real wages. How politically convenient!
Inflation has also been used
Back on the 25th of January last year I reported on a change in the UK’s national accounts from using the Retail Price Index (RPI) to the Consumer Price Index (CPI). It may seem innocent enough until we consider that if output is the same substituting a lower inflation measure will lead to real output being recorded as higher. Hey presto it is magic.
The economist Sam Williamson did some calculations about this. Below is before and after. Let me see if you can guess which is which?
For the last 62 years the United Kingdom’s real GDP has grown at a rate of 2.43%.
The new story is that for the last 62 years the United Kingdom real GDP has grown at a rate of 2.68%.
Good this isn’t it? Soon the credit crunch will be a figment of our imaginations! Can I spend it?
What about rising house prices?
The switch from the RPI to the CPI did have the effect of removing any influence from this area as whilst the RPI has an owner occupied housing component the CPI does not. Convenient eh? Even the most ardent admirers of the CPI system eventually caved in and admitted it required a new version which had a measure of housing costs. Regular readers will be aware that I argued against their choice of rents (Rental Equivalence) rather than house prices for this because it would, on past history, fail to give us useful data should house prices rise again. It has already turned out to be the case that I was right and the official bodies such as the Office for National Statistics (ONS),the National Statistician and the Consumer Prices Advisory Committee were wrong. I will leave you to make your own mind up about house price rises and give you the latest ONS rental series data.
In the 12 months to December 2013 private rental prices paid by tenants in Great Britain rose by 1.0%, down from a 1.1% increase in the 12 months to November 2013.
As you can see that is not really cutting it, even if we make an allowance for public-sector rents being likely to be growing faster. Although actually this seems to have little influence.
The OOH component annual rate is 1.0%, unchanged from last month
Our measure of housing cost inflation (CPIH) is a national embarassment at 1.9% – as in below the 2% of the ordinary CPI. Or as it would be summarised on twitter #fail.
Accordingly I have argued at the Royal Statistical Society for this.
Do we have a way of asking for the CPIH debate to be re-run?
Actually in an irony of modern language, this would be an actual improvement as opposed to the “improvements” regularly claimed by the statistical bodies. It also seemed to be the equivalent of kicking over an ants’ nest as the ONS rather unusually replied and here is Richard Campbell, the head of consumer price statistics.
None of the methods of measuring owner occupiers’ housing costs aim to measure house prices. It is generally accepted practice that consumer price indices measure consumables, not assets. The merits (or not) of a consumer price inflation index including house prices is a different discussion to the method used to measure owner occupiers’ housing costs.
I could write for days if not weeks on my disagreements with that paragraph but let me instead quote from the Eurostat technical manual. You see the first three words in the section defining owner occupier costs are House, Price and Index! Richard Campbell replied in what I would argue is a version of ‘they didn’t really mean it’ or ‘the dog ate their homework whilst chasing the cat’, or ‘it was raining that day’.
So, while the Eurostat index does include an element of house prices it does so as a compromise and does not aim to include them.
Well that’s all right then! But it would seem that they are not following this advice from Elvis Costello.
Oh, Alison, my aim is true.
My aim is true
This matters because in my opinion house prices are a big influence in the UK economy and therefore our inflation numbers should reflect them as best we can. It is not easy as there is the debate over what is growth and what is inflation but in my opinion a proper CPI should be recording it around 2.4% or 2.5% right now and it should go into the GDP numbers. The rub as Shakespeare would put it, is that recorded real output or GDP would fall for the same actual level of output and I suspect that is not the only reason behind the resistance.
It is one of the rules of life that there are always plenty of apparent reasons for doing the wrong thing.
These provided a bit of winter cheer although they were below the expectations provided by the business surveys and bring another in an apparently never-ending sequence of forecasting errors from the Bank of England. Some much for the reviews of this as a latter-day Sir Humphrey scuttles under the nearest stone.
Change in gross domestic product (GDP) is the main indicator of economic growth. GDP increased by 0.7% in Q4 2013 compared with Q3 2013.
GDP was 2.8% higher in Q4 2013 compared with the same quarter a year ago. GDP is estimated to have increased by 1.9% in 2013, compared with 2012.
If we break this down, the vast majority of the quarterly growth came from services (0.61%) but there was a solid contribution from production (0.1%). Agriculture rose but not by enough to be material and disturbingly, considering its recent nuclear winter, construction fell (-0.02%). The underlying index where 2010 is 100 rose to 104.4 and it is nice to see us moving away from 100 where we were stuck for a good while. Should you want a breakdown of the UK economy, the ONS estimate is shown below.
The current 2010 based weights are: services 77.8%; production 15.2%; construction 6.3% and agriculture 0.7%.
Although in not quite so cheery news, there is still one issue to be overcome.
In Q4 2013 GDP was estimated to be 1.3% below the peak in Q1 2008
We should welcome the apparent turn in the UK economy as we desperately need every scrap of economic growth that we can find. Post credit crunch it has been and I think will remain a much rarer commodity than it was before. However as I have shown in my analysis today the improvement is unlikely to be as much as we are being told as the manipulations and machinations persist. All of the “improvements” seem to be in the same direction and a lack of actual growth has seen them appear out of the woodwork. So as we also recall that the preliminary release of GDP data only has around 45% of the final information let me leave you today with the famous line from the US cop series Hill Street Blues.
Hey! Let’s be careful out there