Is the UK's recovery really lagging other countries?
Economists urge caution on growth figures ahead of a tough fourth quarter
It’s rare that a record economic expansion can be described as a “disappointment” but Covid-19 has sent GDP figures careering literally off the charts.
Third-quarter growth figures pointed to an unmatched 15.5pc surge in GDP compared to the previous three months, rebounding from the record collapse during lockdown.
However, the slightly weaker-than-expected rise meant that output is still 9.7pc lower compared to the end of 2019, suggesting that the UK’s recovery is lagging well behind the US and eurozone economies.
The Office for National Statistics (ONS) says that the gap between third quarter GDP and 2019 levels is twice as large as the shortfall in Italy, Germany and France, and almost three times the 3.5pc drop in the US. That may not tell the full story, however.
Some City economists warned the UK economy was losing momentum rapidly before the second lockdown. But others said the gloomy prognosis was derived from a statistical oddity. So what is really going on under the bonnet of the UK economy?
Allan Monks, JPMorgan economist, says the “disappointment in September was fairly broad based”, leaving the economy’s momentum “a little weaker” than hoped.
“Services sectors such as finance, IT and communication and administration and support showed little if any improvement over the month,” he explains.
Victoria Clarke, Investec economist, notes the UK’s collapse and recovery most closely matches struggler Spain. Both countries are more reliant on social consumption – face-to-face activities in the services sector, such as hairdressers and bars – and have failed to control their Covid outbreaks.
“The dominance of private consumption as a component of GDP in the UK appears to be one key factor here, with consumption still impeded, even after the re-opening witnessed so far,” she argues.
However, the ONS itself put a big disclaimer on country-by-country comparisons. Its statisticians warn that UK GDP is held back by the economy’s structure and new restrictions but also the timing of lockdowns and how different countries measure output.
Kallum Pickering, UK economist at Berenberg, advises: “Do not trust the headline data.” He argues nominal GDP may provide forecasters a “better guide” to the economy’s performance.
Real GDP measures output after adjusting for the impact of inflation, and it shows the UK lagging behind international peers.
However, nominal GDP records the country’s “cash” output before adjusting for price moves, and it tells a different story: by this yardstick, the UK’s recovery is largely in line with that of the US, Germany and France.
Pickering says “statistical factors that may be partly specific to the UK” appear to be playing a “significant role” in the headline figures.
As the ONS says, international comparisons should “be made with care”. This is because the ONS’s way of measuring output from health and education – two sectors with output still well below pre-virus level – is different to other countries and could be a factor in exaggerating the decline.
“Unlike most other countries, real government expenditure is derived from the usage of public services,” explains Samuel Tombs, economist at Pantheon Macro. “As a result, this large shortfall reflects hospitals treating fewer patients than usual and schools staying shut until September.”
However, he argues that this distortion is not behind the UK’s weakness and instead highlights a lack of recovery in household consumption compared to other countries.
Economic figures are also prone to big revisions once better data is available. David Cameron’s government was pilloried for the UK suffering an infamous double dip recession in 2012. However, statisticians later rewrote history by revising their figures to show the economy escaped another recession after the financial crisis.
Given the scale of the collapse and rebound in output in 2020, revisions could be larger than normal. Statisticians may have had more difficulties gathering data during the pandemic.
The ONS’s GDP figures are calculated using surveys, such as data from businesses, and “administrative sources” such as VAT receipts.
“We should be humble in the face of our limitations in our ability to actually measure this stuff,” says Pickering.
“The shock was so huge and we're talking about estimated statistics, which are based on samples of a normally functioning economy.
“All of the data will be prone to revision in the future so I would not be splitting hairs between a two percentage point difference between the UK and France in the second quarter.”
Perhaps more important is the future path of the economy. Forecasters now expect the economy to contract again in the fourth quarter despite the vaccine breakthrough boosting next year’s growth prospects.
Even if the UK’s recovery was stronger than the initial figures suggest, the return of lockdown means many of the gains will be lost again anyway
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