From the TUC

ONS Blue Book 2014: GDP revisions in context and changes to the corporate sector

30 Sep 2014, by in Economics

Leaving aside the changes to the household position, this post puts the revisions to headline GDP into an international context, examines the changes to investment that are key to the headline revisions, and looks lastly at the revised picture of corporate finances.

To recap, this morning the ONS released their annual update of the National Accounts, a substantial exercise in 2014 given the implementation of the new international standards (European System of Accounts, ESA 2010 in turn based on the United Nations, System of National Accounts, SNA 2008). Much information has already been drip fed into the public domain, but this morning’s release completed the picture with updated figures for 2013 and 2014.

The level of GDP in cash terms

The upward revisions to the level of GDP followed mainly from the long understood changes to international rules, for example the inclusion of R&D spend as capital expenditure and extensions in the coverage of illegal activities. GDP in 2013 is now estimated at £1,713 billion. The ONS note that the average upward revision to the level of GDP was £53 billion, or 4.1 per cent of GDP.

GDP volumes

The ESA changes were originally expected to be fairly neutral in terms of growth, but in the event real GDP has been revised up since the crisis and down a touch before the crisis, with the recession reduced slightly in severity. The latest profile for real GDP (from the peak in 2008Q1) looks like this: (NB BB14 means, Blue Book 2014, the new data.)

Level of real GDP, 2008Q1=100

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Plainly the peak is restored earlier than previously estimated (in 2013 Q3 rather than 2014 Q2), with the economy now estimated at 2.2 per cent above this point (previously 0.2 per cent). Overall however the ONS judge:

 “The broad economic narrative of the period since 1997 is little altered by the data revisions. This is true even though the most substantial revisions arise around the turning points of the recent economic downturn.”

The four quarter growth rates (on the chart below, alongside the OECD and EU) still show a significant slowdown in the early years of the Coalition, but the pace of the slowdown was marginally reduced throughout. But more importantly, on this international view, the UK is one of many countries seeing a revival in GDP growth, triggered at the end of 2012 when the authorities took fright at the prospect of renewed global recession. Vigorous policy action was led by central banks intervening again to buy assets from financial institutions (the US’s ‘QE infinity’ and the ECB’s ‘outright monetary transactions’);  there was also a relaxation of austerity across the globe including in the UK (though the degree of relaxation varied by country, obviously), as well as increasingly liberalised supply conditions following various deregulations / outsourcing / privatisations; this has all been ‘enjoyed’ more fulsomely by those countries not in the EZ.

Real GDP, percentage change quarter on same quarter a year ago

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The revisions mean that the UK is up 3 places in the ranking of growth since 2010Q1 (for OECD countries, and chosen as the comparison base for the period of the Coalition government), ahead of Switzerland and really marginally (8.1 v 8.0) now ahead of Germany. In broad terms, UK has done better than EU economies, but worse than OECD economies that are not in the EU. On a shorter time horizon UK growth is now closer to the top of the pack, joining Australia, Hungary, Ireland, Korea New Zealand and Australia with annual growth rates of over 3per cent.

GDP growth since Q1 2010

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 Main drivers of revisions

The chart below shows the contributions to the upward change in the level of volume GDP since 2008 (taken from figures in an earlier ONS article). Notably the change over 2008-2012 was more than accounted for by revisions to gross fixed capital investment (GFCF) and changes in inventories. The extent of this change was not expected from the ESA revisions alone, and ONS explain the various factors on GFCF as follows:

… the addition of new Annual Business Survey data for 2011 and 2012; the inclusion of R&D; and other changes including updated data sources, the reconversion of survey data and changes to the supply and use balancing for GFCF following the implementation of with the European System of Accounts 2010 (ESA 2010) across the National Accounts.

It is striking that these changes follow major revisions also to GFCF last year, which were severely problematic (leading to the then new Governor questioning the figures at the Treasury Select Committee). The big changes from inventories mainly follow from changes in the way the National Accounts are constructed; the figures now play a reduced role in balancing the accounts, and the consequent changes dictate some of the changes to the growth of headline GDP.

 Contributions to cumulative change in annual GDP growth from 2007, percentage points

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Another point that could be made on the data is the tendency sometimes for certain revisions to yo-yo. These are the various estimates of the size of the recession of 2008/09.

bb7

Without trivialising a still huge downturn, this challenges HMT to rethink their view that the UK had the worst recession in the world; compare the rest of the G7:

Can

FRA

GER

IT

JAP

US

-4.2

-4.0

-6.9

-7.2

-9.2

-4.2

 Investment

 Nonetheless, these are large changes to GFCF and there is a significantly improved performance here, beginning even before the Coalition took office. The chart shows that on the basis of the new figures the pre-crisis peak has virtually been recaptured in the latest quarter, when previously estimated as well below.

GFCF volumes, 2007Q1 =100

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The trough has been moved earlier and growth since the trough basically trebled; previously to 2014 Q1 growth was only 8.7 per cent, now it is 24.0 per cent.

It should be noted, however, that as a share of GDP, the UK performance remains well short of other countries (the chart shows 2012 figures, given availability of figures for other countries, but the UK share does not change significantly into 2013, to 16.4 per cent from 16.2 per cent in 2012).

GFCF in 2012, percentage of GDP

bb9

Corporate finances

As discussed in my previous post, the gains from increases to GDP did not accrue to the household sector.  Instead, corporate profits (or ‘gross operating surplus’) were revised up. The combination of these upward changes set against increases to capital investment (as well as everything else) has meant a changed profile for the corporate surplus, which was revised up over the period 2008 to 2012 by on average around £10 billion a year. But the figure for 2013 was revised down by £8 billion. The surplus now declines from the recent peak of £69 billion in 2011 to £15 billion in 2013, and to only £642 million in 2014 Q2.

There are, however, significant changes to the corporate balance sheet that follow mainly from major changes to the treatment of pensions. These have been well trailed by the ONS. They result from a change in the way earnings from pension funds are allocated to the household sector as flows of income, and have resulted in a rise in the saving ratio across all years of the ONS data. The change has various counterparts, not least on the balance sheet of companies, where the ultimate liability for these changes appears to score. The aggregate net stock position (or financial net worth) for (non-financial) corporates in 2013 is now -£3.0 trillion, with liabilities of £4.7 trillion outstripping assets of £1.7 trillion. The net worth was previously estimated at -£2.0 trillion, with the difference mainly accounted for by the inclusion of £700 billion of liabilities for pension schemes. Make of it what you will.

One Response to ONS Blue Book 2014: GDP revisions in context and changes to the corporate sector

  1. New ONS analysis shows Coalition/austerity impact on GDP worse than previously thought | ToUChstone blog: A public policy blog from the TUC
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