An economist explains why new official figures have eased the gloom surrounding the UK economy, but haven’t fully dispelled all fears.
T he UK has been transformed from the laggard of developed economy COVID recoveries, after a recent data revision by the Office for National Statistics (ONS) showed its growth was stronger than previously thought after the pandemic-era lockdowns.
The country’s gross domestic product (GDP), a measure of national income that was previously reported as staying below its pre-pandemic level, is now shown to have risen above that point by the fourth quarter of 2021.
A story of how COVID infections and post-Brexit disruptions made the UK the slowest-recovering industrial economy has suddenly switched to one in which, by the end of 2021, it was growing at a similar pace to France and ahead of Germany – although still behind others such as the US.
The same GDP revision has made little difference to earlier years, from 1997 to 2019, so the UK economy wasn’t bigger all along. It’s specifically the pandemic years that saw a smaller downturn and stronger re-expansion than previously believed. Why, then, are the effects of a cost of living crisis still being so widely felt?
The revised national accounts show a V-shaped recovery in 2020-21, but growth rates since then have remained unusually slow. GDP in the second quarter of 2023 was just 0.2% higher than in the first, still below the pre-pandemic trend. And most independent forecasts show year-on-year growth staying unusually weak in the medium term. For example, growth will reach just 0.4% in 2023 and 0.3% in 2024, according to the latest outlook from the British Chambers of Commerce.
This gloomy picture is echoed by figures showing increased poverty and indebtedness since the pandemic. And the GDP revision hasn’t altered cost of living pressures: UK inflation has stayed higher for longer than in other rich economies.
GDP measures national income without saying how growth is distributed throughout the population, and the recent gains have not been evenly spread. Many people on higher incomes emerged from the pandemic with money to spare. Their extra spending has propelled GDP higher, masking the undiluted struggle to afford bills and basics further down the income scale.
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Why has the picture changed?
Economic growth is calculated from surveys that estimate the total amount people spend on goods and services each year. This national expenditure absorbs the national output and generates the national income. Obtaining these three measures of total economic activity, and getting them to match, has become statistically more challenging as UK production shifts from manufacturing to digital products and services, often delivered via third-party platforms.
GDP measures the value added by economic activity, for example when a mill refines raw sugar or a lawyer writes a contract. The ONS must therefore subtract “intermediate consumption” from final output, to avoid double-counting the goods and services used to make the final products firms sell to consumers. And once the ONS has the UK’s total current-price output figure for each year, it must calculate how much of this rise was due to higher output, and how much to rising prices.
Both of these adjustments have been improved, starting in 2023, by using new Supply and Use Tables (SUTs). The SUTs give a more detailed record of sales and purchases at company level, measuring the cost of intermediate inputs more directly than before.
Applying these new SUTs to 2020 data has shown that previous calculations understated the rise in the final goods and services sold by private firms or provided by the public sector. The amount of this rise that was due to real volume increases rather than price increases was also understated. After this was adjusted, the new results show that GDP fell less steeply than previously reported when the pandemic hit in 2020, and recovered more strongly in 2021-22.
The UK is one of the first countries to adopt SUT for its national accounts, along with the US and France. So it is possible that other European countries, now shown to be lagging behind the UK, will catch up when they also make this switch.
Why hasn’t everyone felt the benefits of a ‘better economy’?
ONS statisticians have acknowledged the particular hazards of applying their new methods to the period of COVID disruption. The contrast between the improved statistical picture for the years since 2020 and the financial pain still widely felt across the UK, certainly raises questions about how well GDP captures actual economic conditions, especially in turbulent times.
In 2020-21, the UK government spent unprecedented amounts of public money on things that firms and households usually pay for themselves – from wages under the furlough scheme to fuel bills under the Energy Price Guarantee. With no additional tax revenue to fund this support, the Treasury borrowed, lifting public debt above 100% of GDP.
Although many people needed this help simply to survive, and used it for paying vital bills, it enabled others to amass additional savings – as much as £140 billion, according to official estimates. This unexpected windfall has since allowed better-off households to spend more, resulting in additional consumption that was a major part of the 2021-22 GDP boost.
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The ONS’s recent GDP revision also uses new data from income tax records which shows wages and salaries were lower than previously thought in 2020 and 2021. Companies can raise their GDP contribution by lowering costs, and wage bills are often their largest cost. But the rise in GDP due to wage restraint is of little comfort to those people who have experienced no real pay increase since 2008 as a result.
The new addition to GDP also reflects a build-up of “inventories” – essentially unsold stock – which were previously estimated to have fallen by £11.4 billion in 2020. Inventories are now calculated to have risen by £2.5 billion. When stocks rise because of below-target sales, firms often slow production to clear the unsold goods. This may be another reason the recovery slackened this year.
So, while a suddenly rosier economic picture may raise the UK government’s spirits ahead of the next general election, it must be wary of exuding an optimism that many voters don’t yet share.