Finally, some good economic news. Earlier this month, the Office for National Statistics (ONS) published an obscure release called the “Impact of Blue Book 2023 changes on gross domestic product”. The title might be uninspiring, but it contained some deceptively interesting information.
Previously, in August, the ONS had released second-quarter figures suggesting that GDP was still 0.2 per cent below its pre-pandemic level. This seemingly confirmed that the UK’s recovery from the pandemic was still tortuously slow, and internationally embarrassing: the same release noted that France’s economy was 1.7 per cent above its pre-pandemic level, with the US 6.2 per cent higher.
But, following improvements to data and methodology, the ONS now thinks that the UK economy recovered from the pandemic faster than previously expected. The new data covers the period up to 2021, and examines the costs facing different sectors of the economy, rather than relying simply on turnover data. The revised figures, which are partly down to healthcare sector productivity being much higher than first thought, suggest that the UK economy had recovered to pre-Covid levels by the end of 2021. By this point, the economy was 0.6 per cent larger than its pre-pandemic level – rather than 1.2 per cent smaller as the earlier figures implied.
Using the updated growth rates, analysts at Capital Economics calculated that the economy was actually 1.5 per cent above its pre-pandemic level by the second quarter of this year. Ruth Gregory, deputy chief UK economist, said that “the implication is that the UK economy is no longer at the back of the G7 pack and it is not so far behind the average”. As the table shows, GDP in other G7 countries is 2.6 per cent above pre-pandemic levels on average – albeit that is driven mainly by the US. This turns the prevailing narrative about the domestic economy on its head: Simon French, chief economist at Panmure Gordon, agrees the UK is “no longer a G7 laggard”.
|Country||Q2 2023 compared to Q4 2019, %|
|Selected* G7 average||2.6|
|UK original estimate||-0.2|
|UK revised estimate||1.5|
|Source: ONS and Capital Economics. *NB: data unavailable for Canada and Japan|
French said that “while a debate over narrative may seem superficial to real-world outcomes, we have seen first-hand how the UK economic narrative has shaped the view of asset allocators and their assets for sterling-denominated assets”. He added that if our interpretation of the UK economy has been incorrect, the new figures present the “intriguing prospect that some of this pricing in UK-focused asset markets begins to unwind”.
Though significant, it is worth noting that GDP revisions are relatively common, especially in times of economic ‘excitement’. Craig McLaren, head of national accounts at ONS, said that the seismic real-world events of the past few years have “added increased levels of uncertainty around initial estimates of GDP”. He added that the ONS is “among the first of our international colleagues to update our initial estimates with more detailed data”. This timeliness is impressive, although French rightly points out that we can’t fully ditch the unfavourable UK comparisons until other countries’ revisions are in.
2021 is also firmly in the rear-view mirror, and economists are also sceptical that the UK economy will be able to sustain higher rates of GDP growth in the future. Bank of America analysts point out that the revisions do nothing to change tax revenue for the 2020-21 period, and add that “whether the revisions change future tax revenues depends on potential growth”. Given that Budget forecasts already incorporate relatively optimistic productivity assumptions, they see “few fiscal implications from the growth revisions”. They say there is “probably no more fiscal room” as a result of the new figures.
Capital Economics’ Gregory points out that the revisions “may not change the Bank of England’s (BoE) thinking too much”, either. This makes sense: rate-setters are concerned about UK services inflation and wage data, which remain unchanged. She expects the BoE to “keep on top of demand to tame inflation”, and sees base rates reaching 5.5 per cent – and staying there until late 2024. Although the economic narrative may have changed, the policy outlook hasn’t.