Ross Clark Ross Clark

Britain’s economic bounce back is less impressive than it seems

(Getty images)

The UK economy is rebounding at the fastest rate in Europe, and faster even than the United States: that is the general tone of reporting of today’s GDP figures, which show that the UK economy expanded by 4.8 per cent in the second quarter of 2021. That is compared with 0.9 per cent in France, 1.5 per cent in Germany and 1.6 per cent in the US.

But hang on, dig a little deeper and there is something a little odd going on with the figures. Compare nominal and real changes in GDP during the second quarter and it produces the following:

UK, nominal growth in second quarter: +3.6 per cent; real growth in second quarter: +4.8 per cent

France, nominal growth in second quarter: +1.0 per cent; real growth in second quarter: +0.9 per cent

What it means is that the rebound of the UK’s economy is a bit less impressive than it at first seems

Germany, nominal growth in second quarter: +1.4 per cent; real growth in second quarter: +1.5 per cent

United States, nominal growth in second quarter: +3.1 per cent; real growth in second quarter: +1.6 per cent

Adjust for inflation, in other words, and growth in France and the US falls. Yet in the case of the UK – and to a lesser extent Germany – it rises. That would imply that the UK is witnessing deflation – when in fact the Consumer Prices Index (CPIH) is running at +2.4 per cent. So what is going on?

It turns out that it comes down to a statistical quirk in the way that the ONS measures economic activity in the public sector. While many other countries simply count the money spent on public services – teachers’ wages, the value of drugs bought for their public healthcare systems etc – the ONS looks at the level of activity itself. It counts the number of GPs’ visits, the number of hip-replacements, the number of lessons in schools and so on. Come lockdown, and a lot of this activity fell very sharply. Hence the contribution of public services to GDP fell with it. As lockdown was eased and pupils returned to school, and non-emergency surgery on the NHS recommenced, and the opposite happened: the contribution of public services to GDP boomed, helping to produce today’s impressive GDP figures.

In countries where the statisticians look at inputs into public services, on the other hand, the measured collapse in public sector activity during lockdown was much lower (schools didn’t stop paying teachers’ salaries even if they were not giving face-to-face lessons, for example). Consequently, the rebound in the economy following the easing of lockdown is likely to be much lower.

What it means is that the rebound of the UK’s economy is a bit less impressive than it at first seems. However, it also means that last year’s GDP figures – when the UK economy seemed to collapse at a higher rate than many other economies – were likely to be equally skewed. At the time, you may remember how the poor relative performance of the UK economy was taken as a symptom of government mishandling of the pandemic. Had we gone into lockdown earlier, we were told, we might have suffered much less of a hit. In fact, the UK economy never did underperform as badly as it seemed from cross-comparison with other countries’ figures – and nor is it now over performing quite as well.

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