Two quarters of shallow negative GDP growth may be just enough for the UK to be in a mere ‘technical’ recession, but seven successive quarters of negative GDP growth per capita present a more worrying picture.
The Office for National Statistics (ONS) released its latest statistics on quarterly GDP on 15 February 2024, reporting that GDP in the fourth quarter of 2023 (October to December) had fallen by 0.3% compared with the previous quarter, which in turn was 0.1% below the quarter before that. This was sufficient for the UK to meet one of widely accepted definitions of a recession: two successive quarters of economic contraction.
Many economists have chosen to describe this as a ‘technical’ recession given how shallow the fall in growth has been over the past two quarters, very different from the scale of contraction seen in ‘proper’ recessions such as that experienced during the financial crisis (when GDP fell in the order of 6% over four successive quarters). The ‘technical’ label also emphasises how relatively small subsequent revisions to the quarterly statistics could easily lift the UK out of recession again.
Perhaps more worrying for all of us living in the UK are how changes in GDP per capita have been negative over the past seven quarters, as illustrated by our chart this week. GDP per person can often be more important to individuals than the overall change in GDP given how living standards are, by definition, experienced on a per capita basis.
According to the official chained volume measure of GDP per head, economic activity per capita grew by 0.2% in the first quarter of 2022 (over the previous quarter) but has declined since then: by -0.2%, -0.2% and -0.0% respectively in the second, third and fourth quarters of 2022, and then -0.1%, -0.2%, -0.4% and -0.6% in the first, second, third and fourth quarters of 2023.
Overall, this is equivalent to a reduction of 1.5% in GDP per head between the fourth quarter of 2021 and the fourth quarter of 2023, although one additional note of caution is that the per capita numbers are based on population projections that are even more susceptible to revision than estimates of the size of the economy. Despite that, these numbers are not a sign of an economy doing well.
The per capita numbers put the reported GDP growth rates for the same eight quarters of +0.5%, +0.1%, -0.1%, +0.1%, +0.2%, +0.0%, -0.1%, and -0.3% respectively (equivalent to cumulative GDP growth of +0.4% between 2021 Q4 and 2023 Q4), into perspective, highlighting just how weak the performance of the UK economy has been over the past two years.
Just as the recession is being described as ‘technical’, there are good arguments for describing positive growth in GDP as also ‘technical’ when per capita growth is negative at the same time, reflecting how much stronger economic growth needs to be for living standards to improve.
This week’s chart takes a look at recent revisions to GDP that have caused some consternation in the world of statistics.
Each year the Office for National Statistics (ONS) publishes the ‘Blue Book’ on the national accounts, its definitive analysis of economic activity over the course of the previous year. This analysis supersedes the preliminary and revised monthly and quarterly estimates issued up until that point, based on extensive analysis by the official statisticians.
The 2023 edition of the Blue Book is scheduled to be published on 31 October 2023. It will be eagerly pored over by economists in and outside government who will be eager to understand how the UK economy performed during 2022, and how this ‘final’ version of the 2022 numbers line up with those preliminary and revised estimates, just as they did last year when looking at GDP for 2021.
However, in the world of statistics numbers are never final. On 1 September 2023, the ONS announced methodological and data improvements to last year’s Blue Book – the numbers for 2021 and earlier years. These prior-period adjustments partly reflected a methodology change in the way the three different methods of calculating GDP (output, income and expenditure) are reconciled, but much more significant were revisions to the data used to calculate some of the key statistics, causing much wailing and gnashing of teeth by some prominent economic commentators as the narrative around the UK’s emergence from the pandemic changed.
As our chart this week illustrates, the revisions to GDP do not at first sight appear to be that significant. GDP for 2019 has been revised down by £4bn from the previously reported £2,238bn to a new official number of £2,234bn; GDP for 2020 is £6bn down from £2,110bn to £2,104bn; and GDP for 2021 has been revised up by £14bn from £2,270bn to £2,284bn. These seem relatively small changes when looking at trillions of pounds of economic activity.
Where the change really has an impact is in looking at the trends, especially after adjusting for inflation. On a nominal basis, a 5.7% nominal decrease in 2020 followed by a 7.6% increase in 2021 has changed to a 5.8% decrease and an 8.5% increase, but in real terms the previously reported economic contraction of 11.0% in 2020 followed by a 7.6% recovery has changed to a smaller contraction of 10.4% followed by a stronger recovery of 8.7%.
Of course, the devil is in the detail and some of the revisions at an industry level have been much more dramatic, with wholesalers and retailers now believed to have grown more strongly than previously believed, while the iron and steel industry changed from growth to contraction.
Many economic commentators have focused on the change in quarterly GDP (not shown in the chart) where the arithmetical changes have been more pronounced. The movement from the fourth quarter of 2019 (previously £568bn, now £566bn) and the fourth quarter for 2021 (previously £593bn, now £597bn) has gone from a 4.4% increase over two years to a 5.5% increase; in real terms from a 1.2% contraction in the economy to growth of 0.7%. Still anaemic, but at least in positive territory.
Despite this small improvement in the economic story portrayed by the GDP statistics, we should not get too carried away. Economic growth remains well below the pre-financial crisis levels and the public finances are in a significantly worse state than they were back in 2008.
In the meantime, the Office for Statistics Regulation has commenced a review into how these small revisions with big implications for our understanding of the economy were not identified at the time.
This week’s chart reviews the sharp increase in the national debt to GDP ratio as we reflect on the challenges facing Chancellor Rishi Sunak.
Better tax receipts and higher inflation are expected to contribute to an improvement in the fiscal forecasts that will accompany the Spring Statement on 23 March 2022, further increasing the pressure on the Chancellor to do more to support households and businesses facing spiralling energy prices and a cost-of-living crisis.
Our chart this week is based on the latest official forecast for public sector net debt prior to its update on 23 March 2022 at the Spring Statement. The chart highlights how it took five years for debt to increase from 79.8% to 82.7% as a share of GDP before leaping to a projected 98.2% over the two years to 31 March 2022 and then falling to a projected 88.0% at 31 March 2027.
The debt to GDP ratio is probably the most important key performance indicator used by most governments to assess their public finances, so much so that when ministers talk about reducing debt, they do not mean paying back the amounts owed to debt investors (unless they are in the German government). Instead, governments in most developed countries aim to borrow at a slower rate than the increase in the size of the economy, allowing the combination of economic growth and inflation to offset the often-significant sums of cash required to finance the shortfall between tax receipts and public spending.
This objective has been difficult to achieve over the past decade of low economic growth and low inflation, as illustrated by the increase in the UK’s debt to GDP ratio from 79.8% to 82.7% between 31 March 2015 and 2020. In cash terms, public sector net debt increased by £261bn from £1,532bn to £1,793bn over that five-year period, equivalent to 12.6% of a year’s GDP. The debt to GDP ratio only went up by 2.9 percentage points, with economic growth and inflation offsetting the increase in the amounts owed by the equivalent of 9.7% of GDP. (The objective would have been achieved but for a quirk in the choice of GDP measure used for this calculation by the Office for National Statistics in the UK, which is ‘mid-year GDP’; at 31 March 2020 this encompassed both the last six months of 2019/20 before the pandemic but also the first six months of 2020/21 and the lockdowns that occurred during that time, reversing some of the economic growth experienced in the preceding five years.)
The chart goes onto illustrate how the more than half a trillion pounds (£576bn or 26.1% of GDP) borrowed by the government in just two years over the course of the pandemic is partially offset by the economic recovery and a great deal more inflation, reducing the impact on the debt to GDP ratio by the equivalent of 10.6%.
Debt as a share of GDP over the next five years is then expected to decline, with a projected net addition of £198bn (7.8% of GDP) expected to be added to debt according to last October’s forecast. Projected public sector net debt of £2,567bn at 31 March 2027 is currently expected to be lower in proportion to the size of the economy at 88.0% of GDP, as the post-pandemic recovery and already forecast higher rates of inflation cause GDP to rise at a faster rate than the government can borrow, resulting in a reduction equivalent to 18.0% of GDP.
The official projections for the current financial year, prepared last October by the Office for Budget Responsibility (OBR), are expected to be revised upwards to incorporate the stronger tax receipts reported in recent monthly public sector finance reports and higher levels of GDP from even higher rates of inflation than previously expected. These effects are likely to combine to reduce the 98.2% of GDP forecast for debt for the end of March 2022 by several percentage points.
There is a much greater deal of uncertainty about how the OBR’s medium-term projections will deal with the potential future path of the pandemic, the cost-of-living squeeze on household incomes, and the effect of the war in Ukraine and sanctions on Russia on UK businesses. This is in addition to its normal difficulty in both measuring and forecasting the trillions of financial transactions that are undertaken every year in an economy of more than 67m people.
Many economic commentators expect stronger tax receipts and higher inflation to flow through to the projections for the next five years, even after taking account of the increased interest costs that come from higher rates of inflation and higher interest rates and the already announced package of support measures for households struggling with energy price rises. This should in theory result in a substantial improvement in the projected debt to GDP ratio in March 2027 from the 88.0% previously forecast, but what we won’t know until the Spring Statement is to what extent Chancellor Rishi Sunak intends to spend some of that improvement.
Mixed signals mean that it is difficult to tell to whether there will be an improvement to the support package to households facing large rises in their energy costs and the prices they pay for food and other essentials, whether the Chancellor will also choose to reduce fuel duties to help motorists, and how far he will opt to support businesses affected by substantially higher input costs in addition to the knock-on effects of the war in Ukraine and sanctions on Russia. Not to mention the political pressure on the Chancellor to announce increases in the defence budget now rather than waiting for the Autumn Budget.
For what was envisioned as a quiet fiscal occasion dealing with routine revisions to the fiscal forecasts, the Spring Statement has turned into a significant fiscal event. After all, even if the Chancellor decides to do nothing, that will still be a choice, with major implications for the public finances and the UK economy.
As the sage once said (or possibly didn’t), we live in fiscally interesting times.
GDP statistics have become much more exciting, with low but steady growth in per capita GDP before the pandemic giving way to large swings as the economy adjusts to a major shock.
GDP for the fourth quarter of 2021 was calculated to be £596bn by the ONS in its first estimate of this statistic measuring economic activity in the UK, bringing the provisional estimate for the full year to £2,318bn for the 2021 calendar year. On a per capita basis, this was equivalent to approximately £8,820 per person for the fourth quarter and £34,330 per person for the year.
The ICAEW chart of the week looks at how quarterly GDP has changed in real-terms over the past few years on a seasonally adjusted basis – demonstrating how boring GDP statistical releases were in the ‘before times’. Then, a relatively steady average per capita increase of approximately 0.3% each quarter reflected the low but steady level of economic growth that has been seen since the financial crisis. The arrival of the pandemic has seen all that change, with a collapse in GDP during the last half of 2020, followed by a stop-and-start recovery over the past few quarters, with provisional GDP estimate growing by 0.9% in the fourth quarter – faster than the pre-pandemic years, but slower than the revised 1.0% reported for Q3 and the 5.5% rise in Q2 of 2021.
The change in real-terms quarterly GDP per head in 2020 and 2021 illustrated by the chart were -2.7%, -19.5%, +17.4%, +1.3% and -1.3%, +5.5%, +1.0%, +0.9% respectively. It is, of course, always important to note that the statistics reported by the ONS are subject to frequent revision, especially when trying to count up the trillions of transactions entered into each quarter in a large and complex economy like the UK’s. The population estimates used for calculating per capita amounts are also likely to be revised, in particular once the results of the 2021 census are finalised in a few months’ time.
Despite the recovery in the last three quarters, GDP and GDP per capita remained below their peaks in the third quarter of 2019 and more significantly below the trend the economy was on.
With rapidly rising inflation, supply chain disruptions and uncertainty regarding how society will transition from a coronavirus pandemic to an endemic, the likelihood is that quarterly GDP releases are likely to continue to be observed with some excitement by economists (and the rest of us) for some time to come.
This week’s chart takes a look at the rebound in UK gross domestic product in March 2021, despite the country remaining in lockdown.
UK GDP jumped 2.1% in March 2021 according to the Office for National Statistics. A positive sign but, as our chart of the week illustrates, there is still a long way to go to get back to pre-pandemic levels of economic activity.
The #icaewchartoftheweek is on the economy this week, taking a look at how the latest economic statistics from the Office for National Statistics indicate a rebound in GDP in March 2021 even as the country remained in lockdown. This is a positive sign as the UK starts to emerge from the pandemic and people start to return to ‘normality’, albeit a new normal that is likely to be different to what came before.
However, the chart also makes clear how far the UK still has to go to return to pre-pandemic levels of economic activity, with the anticipated square-root shaped recovery stopped in its tracks in the last quarter of 2020 as COVID-19 resurged and restrictions on daily life were reimposed. The 2.1% real-terms growth in GDP in March follows a pattern of ups and downs in recent months with a fall of 2.2% in November, an increase of 1.0% in December, a fall of 2.5% in January, and an increase of 0.7% in February.
With the progress made in combating the virus over the last few months enabling lockdown restrictions to be progressively lifted across the UK, the hope is that March will be the second month on a more sustainable upward curve.
12 March 2021: This week’s chart illustrates how an expected increase of £1tn of additional public debt between 2020 and 2026 translates into the debt to GDP ratio.
This week’s #icaewchartoftheweek illustrates how a trillion pounds of extra public debt translates into the debt to GDP ratio. This rises from 84.4% last March to a forecast peak of 109.7% in 2024 before falling to 103.8% in 2026, according to the medium-term economic and fiscal forecasts from the Office for Budget Responsibility (OBR) that accompanied the Spring Budget. These forecast a rise in public sector net debt from £1.8tn at 31 March 2020 to £2.8tn at 31 March 2026.
Most of the additional borrowing is expected to occur in the period to March 2024, with £781bn (equivalent to 35.2% of a year’s GDP) borrowed to fund four years of deficits – an estimated £355bn (16.9% of GDP) in the current financial year and forecast deficits of £234bn (10.3% of GDP), £107bn (4.5% of GDP) and £85bn (3.5% of GDP) in 2021-22 through 2023-24 respectively. A further £168bn (7.5% of GDP) is needed over that same period to fund lending and working capital requirements.
Despite borrowing the equivalent of 42.7% of GDP, the debt to GDP ratio is expected to increase by a smaller amount – 25.3% of GDP from 84.4% at 31 March 2020 to 109.7% of GDP at 31 March 2024. This reflects an increase in the denominator for GDP, as a combination of inflation and economic growth ‘inflate away’ the debt by the equivalent of 17.4% over four years. This effect appears quite large, given the annualised growth of 0.7% a year forecast over the four years (comprising a 12% fall during the current financial year followed by growth of 10% in the coming financial year, 5% in 2022-23 and 1.5% in 2023-24) and an average GDP deflator inflation rate of 1.8%, but the magic of compounding, combined with timing differences in the value for GDP used in the calculation all multiply up.
The following two years see the forecast debt to GDP ratio decline to 103.8%. Debt is only expected to increase by £57bn (or 2.2% of GDP) over these two years because lending to businesses during the pandemic is expected to be repaid, reducing the £148bn (5.7% of GDP) needed to fund deficits of £74bn (2.9% of GDP) in 2024-25 and £74bn (2.8% of GDP) in 2025-26 by a net cash inflow of £91bn (3.5% of GDP). As a consequence, the debt to GDP ratio is forecast to drop by 5.9% overall once 8.1% of ‘inflating away’ is taken into account.
As with all forecasts, the reality will be different. A stronger economic recovery would both reduce the need for borrowing and increase the size of GDP at the same time, accelerating the decline in the debt to GDP ratio. A weaker recovery combined with higher spending in response to pressures on public services and/or higher interest rates might do the reverse. Either way, the debt to GDP is likely to remain at a significantly higher level than the pre-financial crisis 34% seen in 2008 for many years, if not decades, to come.
12 February 2021: The UK wrote to New Zealand at the start of this month formally requesting permission to apply for membership of the Comprehensive and Progressive Trans-Pacific Partnership. What is the CPTPP and what opportunities would joining provide to the UK?
The #icaewchartoftheweek is on the UK’s application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a group of eleven countries on the other side of the world. This trade organisation was established to improve trade links between countries surrounding the Pacific, reducing trade barriers between the countries involved and aligning regulations in areas such as intellectual property.
It is sometimes described as the third largest free-trade area in the world, after the US-Mexico-Canada Free Trade Agreement (USMCA, formerly NAFTA) and the EU-EEA-Switzerland Common Market, but it is important to understand that it is much less integrated than a customs union (with shared tariffs), a common market (with fuller regulatory alignment) or an economic union (such as the highly integrated EU Single Market with unified standards and regulations).
According to IMF forecasts for 2021, Japan is the largest economy in the CPTPP with GDP of £3,815bn, while Brunei is the smallest with GDP of £9bn. The other members are Canada (£1,335bn), Australia (£1,125bn), Mexico (£890bn), Malaysia (£280bn), Vietnam (£275bn), Singapore (£270bn), Chile (£220bn), New Zealand (£165bn) and Peru (£150bn). This compares with a forecast of £2,180bn for UK GDP in 2021.
Membership is not exclusive, with CPTPP members involved in a number of other multilateral free trade agreements. Canada and Mexico are also members of USMCA. Malaysia, Singapore, Vietnam and Brunei are members of the 10-nation Association of South East Asian Nations (ASEAN), which in turn has free trade agreements with Japan, Australia and New Zealand, China, India and South Korea. Mexico, Peru and Chile are members of the four-nation Pacific Alliance with Columbia. In addition, China is leading the formation of the Regional Comprehensive Economic Partnership which includes all of the non-Americas members of the CPTPP in addition to China, South Korea and the other members of ASEAN.
The CPTPP replaced the original proposal for a Trans-Pacific Partnership (TPP) that would have included the US, but the remaining nations decided that it was still worthwhile pursuing a revised trade arrangement even after the US withdrew its application four years ago. A new administration could see the USA change its mind and seek to join the CPTPP after all.
Why does the UK want to join a trade pact on the other side of the world? The immediate trade benefits are likely to be relatively modest given the distances involved and which are likely to be secured through bilateral trade agreements already under discussion.
One reason is likely to be geo-political, as membership would strengthen relationships with allies in the Pacific, advancing the UK Government’s ‘global Britain’ agenda. There may also be an advantage in being directly involved in the development of international trade policy in the Pacific region which contains the two largest individual economies in the world (the US and China), potentially influencing trade policy across the planet.
Of course, part of the motivation might be less about trade in the Pacific and more about trade across the Atlantic. After all, if the US were to join the CPTPP, the UK’s membership might provide a base from which to eventually develop a more comprehensive bilateral free trade agreement. This could fulfil a key strategic objective of improving trade ties with the USA by going around the world, albeit in a lot more than 80 days!
29 January 2021: The UK economy is expected to shrink over the three years from 2020 to 2022, compared with flat growth in the Eurozone, modest growth by the USA and relatively strong growth by China.
The IMF released updated economic forecasts this week, estimating the world economy shrank by 3.5% in 2020 with output projected to increase by 5.5% in 2021 and 4.2% in 2022. World output over the three years is now expected to see an average annualised growth rate of 2.0%.
The UK’s economy has been one of the hardest hit by the coronavirus pandemic, shrinking by an estimated 10.0% in 2020. Growth prospects are weak, with forecasts of 4.5% and 5.0% in 2021 and 2022 respectively bringing the annualised average growth rate over three years to a negative 0.4%. This contrasts with the 1.4% average growth forecast last year in the Spring Budget 2020, meaning that the UK economy is now projected to be around 4.7% smaller in 2022 than pre-pandemic expectations.
Prospects for the Eurozone countries are also disappointing, with forecast growth in 2021 and 2022 expected to bring their economies back to where they started and substantially below where they might have expected to have been without COVID-19.
The USA economy appears to be more resilient, with growth in 2021 expected to offset the decline experienced in 2020 by a modest amount, bringing annualised growth over the three years to 1.3%.
In contrast, China expects to see annualised growth of 5.3% as it recovers from much slower than normal growth in 2020 as a consequence of the pandemic. While this is relatively strong compared with most other countries, China itself will consider this to be a relatively modest level of growth compared to the recent past.
IMF World Economic Outlook Update – summary and selected countries
2 October 2020: The latest statistics for the UK economy generate a grim graphic for the #icaewchartoftheweek.
According to latest numbers from the Office for National Statistics (ONS) released on 30 September 2020, GDP for the second quarter to June 2020 fell to £476bn, a 14.5% fall in economic activity compared with the previous quarter, which in turn was 0.5% lower than the last quarter of 2019.
This week’s chart not only illustrates the damage done by the coronavirus pandemic to the economy in the first half of 2020, but also highlights how poorly the economy was performing in past couple of years, with seasonally-adjusted GDP increasing by an average of 0.8% a quarter from £528bn in the first quarter of 2018 to £558bn in the fourth quarter of 2019.
These percentage changes do not take account of the effect of inflation, with the ONS reporting a headline fall of 19.8% in real GDP in the second quarter and a 2.5% drop in the first quarter on a chained volume basis (the method used by the statisticians at the ONS to adjust for the effects of changing prices and output levels across the economy). Average quarterly real economic growth in the seven quarters to Q4 2019 was just 0.3% and around half that on a per capita basis.
The two pieces of good news are that the decline in GDP in the second quarter was less steep than originally feared, while we also know that the economy has recovered to a significant extent in the third quarter to 30 September, although we won’t know by how much until the statistics are published in November. Unfortunately, with local lockdowns across the country, the likelihood is that it will be sometime before our lives return to normal.
17 July 2020: Debate rages about which symbol to attribute to the shape of the economic recovery.
The #icaewchartoftheweek is on the economy this week, with the Office for Budget Responsibility indicating that hopes of a sharp V-shaped recovery have receded. Instead, their central scenario is for a square root-based recovery – with economic activity recovering less quickly than originally hoped and not to the same level predicted before the pandemic took hold in the UK.
According to the OBR, quarterly GDP fell from £558bn in the fourth quarter of 2019 to £432bn before inflation in the second quarter of this year, a drop of almost 23% in the level of economic activity. Under the OBR’s central scenario GDP in real-terms is not expected to get back to where it was until the fourth quarter of 2022. At a predicted £584bn (excluding inflation) in the first quarter of 2025, GDP would be 3% lower than where it was predicted to be prior to the pandemic.
The OBR hasn’t completely ruled out a V-shaped recovery as a possibility and their upside scenario would see the economy returning to the previous trend by the second quarter of 2021. However, with job losses starting to accelerate, such a speedy return to trend seems increasingly unlikely.
The good news is that the OBR’s downside scenario, for which no symbol has yet been assigned, is not as shallow as the dreaded U-shaped recovery that some economists are worried about. In the downside scenario, economic activity recovers by the middle of 2024, unlike a U-shaped recovery that might extend into the second half of the 2020s.
In practice, the fortunes of different sectors of the economy are likely to vary, with some suggesting the recovery is more likely to be K-shaped, with some sectors stalling just as others emerge to grow back strongly following the end of the lockdown. The Government will be hoping that the fiscal interventions it has announced to support the hospitality, leisure and housing sectors in particular will help prevent the ‘full K’.
