ICAEW chart of the week: Quarterly GDP

2 October 2020: The latest statistics for the UK economy generate a grim graphic for the #icaewchartoftheweek.

Chart showing GDP by quarter from 2018 Q1 to 2020 Q2: £528bn, £533bn, £539bn, £542bn, £548bn, £551bn, £556bn, £558bn, £556bn, £476bn.

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.

This chart was originally published on the ICAEW website.

ICAEW chart of the week: public sector employment

25 September 2020: The #icaewchartoftheweek is on headcount in the public sector, which increased by 115,000 to 5,508,000 in the year to June 2020.

Chart showing change in headcount from June 2019 to 2020: NHS +88k, other health & social work -7k, education -9k, police +12k, forces +4k, civil service +11k, public admin +8k, other +8k = +115k.

Employment on a full-time equivalent (FTE) basis also increased over the last year, with an increase of 118,000 from 4,485,000 FTEs in June 2019 to 4,603,000 FTEs in June 2020.

The NHS workforce jumped by 55,000 in the first six months of 2020 and by 88,000 in the year to June as the coronavirus pandemic accelerated recruitment of health workers. The NHS is the one part of the public sector that has seen consistent headcount growth over the last decade, with 1,782,000 employees at June 2020 compared with 1,558,000 a decade ago. This has been partly offset by a fall in other health and social workers of 7,000 to 208,000 in the year to June, which is 191,000 lower than the 399,000 employed in June 2010.

Public employees working in education also fell by 9,000 to 1,487,000 in June 2020, bringing the total fall over the last decade to 198,000, driven by a combination of cuts in education funding and the reclassification of further education colleges to outside the public sector.

Police numbers (including civilian staff) have started to increase again, with a headcount of 261,000 in June 2020, up 12,000 over a year previously. However, this is still significantly below the 292,000 that were employed in June 2010. HM Forces numbers also started to increase again after a long period of decline, with the approximately 4,000 service personally added to reach 156,000 still substantially less than the 197,000 serving in June 2010.

Civil Service numbers increased by 11,000 over the year to 459,000, with Brexit being a major contributor to the increase from the low-point of 416,000 employed in June 2016, by still significantly below the 517,000 civil servants working in June 2010. Other public administration headcount increased by 8,000 to 614,000 in June 2020, down from 682,000 a decade previously.

The number of other public sector workers increased by 8,000 in the year to 541,000. This is substantially below the 1,105,000 employed in other categories in June 2010, principally because ten years ago the public sector included housing associations, Royal Mail, Direct Line, Lloyds Banking Group and Northern Rock all of which have since been reclassified to the private sector. (Royal Bank of Scotland and Bradford & Bingley remain in the public sector).

Adjusted for reclassifications, total public sector headcount is 215,000 lower than it was a decade ago, reflecting an increase of 224,000 in NHS employees and a net decline of 439,000 across the rest of the public sector.

With Brexit preparations accelerating and the NHS under severe pressure as we approach winter, it is likely public sector employment will continue to rise in the near future.

This chart was originally published on the ICAEW website.

ICAEW chart of the week: A square root-based recovery?

17 July 2020: Debate rages about which symbol to attribute to the shape of the economic recovery.

Chart on OBR Real GDP growth forecast. Shows huge economic hit in the first half of 2020 with potential recovery paths to Q1 2025. Upside scenario returns to previous trend by 2021, central scenario recovers but not fully, and downside is even worse.

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’.

This chart of was originally published by ICAEW.

ICAEW chart of the week: Economic lockdown

19 June 2020: Economic contraction sees monthly GDP per capita decline from £2,790 in February 2020 to £2,100 in April 2020.

UK GDP per person per month - April 2019: £2,740 +£50 = Feb 2020: £2,790 - Mar £160 - Apr £530 = April 2020: £2,100.

The #icaewchartoftheweek is on the economy this week, illustrating how average GDP per person per month increased from £2,740 in April 2019 to £2,790 in February 2020, before contracting sharply in March and April.

The increase of £50 per person in economic activity between April 2019 and February 2020 was predominately driven by inflation, with per capita economic growth of less than 0.4% over the 10 month period. This reflects just how weak the UK economy was immediately before the pandemic.

The modest increase up to February 2020 is dwarfed by the dramatic changes seen as a consequence of the pandemic, with severe curtailments in many parts of the economy leading to a 5.8% fall in economic activity in March and a further 20.4% in April according to provisional numbers from the Office for National Statistics.

Monthly GDP was estimated to be £183bn in April 2019, £187bn in February 2020 and £141bn in April 2020. The population was projected to be just over 66.7m in April 2019, rising to 67.0m by February 2020, before increasing very slightly in March prior to the lockdown and then falling a little in April.

The #icaewchartoftheweek is on the economy this week, illustrating how average GDP per person per month increased from £2,740 in April 2019 to £2,790 in February 2020, before contracting sharply in March and April.

The increase of £50 per person in economic activity between April 2019 and February 2020 was predominately driven by inflation, with per capita economic growth of less than 0.4% over the 10 month period. This reflects just how weak the UK economy was immediately before the pandemic.

The modest increase up to February 2020 is dwarfed by the dramatic changes seen as a consequence of the pandemic, with severe curtailments in many parts of the economy leading to a 5.8% fall in economic activity in March and a further 20.4% in April according to provisional numbers from the Office for National Statistics.

Monthly GDP was estimated to be £183bn in April 2019, £187bn in February 2020 and £141bn in April 2020. The population was projected to be just over 66.7m in April 2019, rising to 67.0m by February 2020, before increasing very slightly in March prior to the lockdown and then falling a little in April.

The dramatic transformation in the UK economy wrought by the lockdown is now extremely visible in the statistics, but it will take some time for the post-lockdown economic position to emerge in order to be able to see how much permanent damage has been done.

This article was originally published by ICAEW.

ICAEW chart of the week: UK electricity usage

24 April 2020: A dramatic decline in electricity usage confirms the scale of the economic downturn and the impact that will have on tax receipts.

Chart showing 7-day moving average electricity usage between 1 Feb and Apr 22 falling below the 5-year average.

The coronavirus pandemic is having a huge impact on all of us, including in our usage of electricity as illustrated by the #icaewchartofthemonth.

For example, the seven-day moving average electricity generated as of 21 April 2020 was 531 GWh, 23% lower than the 690 GWh supplied on average in the previous five years. This is a dramatic fall, reflecting the closure of much of our high streets, most offices and many factories across the country.

Admittedly, some of the decline will be down to weather, with April in particular being much warmer than usual. However, the collapse in demand since the Great Lockdown began is dramatic, demonstrating just how much has changed in just a few weeks.

A silver lining to the current situation is a significant reduction in carbon emissions, with zero electricity generated from coal or oil power plants in recent weeks. Gas-fired power stations are currently providing only around 20% of UK energy supply, with wind, solar and hydropower together providing in the order of 50% each day. Nuclear provides a further fifth, with the balance coming from biomass (around 5% or so) and imports from France, Belgium and Netherlands (a further 5%, much of which is either from nuclear power plants or from renewable sources in any case). This is very positive news for the environment, even if a bit of a headache for the National Grid electricity system operator in managing a very different mix of generation than normal.

Unfortunately, we will have to wait quite a while to see how this translates into economic statistics, with the OBR amongst others suggesting that the economy could contract by as much as 35% in the second quarter of 2020. This will have major implications for tax receipts and government borrowing, which are rapidly moving in opposite directions.

This chart was originally published by ICAEW.

ICAEW chart of the week: UK card activity

9 April 2020: Debit and credit cards were used 19.7bn times in 2019, with £722bn spent.

Debit and credit card activity in the UK 2019: 19.7bn transactions for £722bn.  Debit cards 15.6bn for £503bn, credit cards 4.1bn for £219bn.

This #icaewchartoftheweek is on the subject of credit and debit usage in the UK, with UK Finance (the trade body for the banking and financial sector) reporting that £722bn was spent on UK and overseas cards in 2019. This comprised 19.7bn transactions at an average of just under £37 per transaction.

Average spending on credit cards at £53 per transaction was higher than the average of £32 spent on each debit card transaction. As a consequence, credit cards were around 30% of the total spend, but 21% of total transactions.

The number and value of contactless transactions both increased by 16% compared with 2018, as more and more people chose to use this form of payment. The average contactless spend was £9.35 on 8.6bn occasions, in contrast with the £81 spent on each of the 2.7bn online transactions in 2019, and the average of £50 incurred in 8.4bn non-contactless transactions.
 
Overall spending on credit and debit cards in 2019 was only 0.2% higher than in 2018, even though the number of transactions was up by 7.3%. This provides an indication of the weakness in the UK economy before recent events.
 
Of course, what we all want to know if what is happening right now. With the country in lockdown, the number and value of transactions are likely to fall significantly. We will be poring over that data as soon as it is made available!

IFS: deficit to triple as budget contingency increases

30 March 2020: the Institute for Fiscal Studies (IFS) has suggested that the budgeted fiscal deficit for the financial year starting 1 April 2020 of £55bn could more than triple to £177bn due to the coronavirus pandemic.

In a new publication, the economic research institute also stated that there is a chance the 2020-21 deficit could end up exceeding £200bn.

The Chancellor has already stopped reporting financial estimates for a series of emergency measures, such as the funding of 80% of pay for furloughed workers and support for self-employed workers, incurring tens of billions of public money to keep an economy going whilst in lockdown.

The Contingencies Fund Act 2020 (passed by Parliament on 25 March 2020 alongside the Coronavirus Act 2020), increases the amount available for contingencies from a limit of 2% of spending authorised by Parliament in the preceding financial year to a limit of 50%. In effect, this gives the Chancellor the power to spend an additional £266bn in 2020-21 over and above spending plans already announced, a substantial increase from the £11bn that would have been available otherwise.

The IFS’s estimate assumes that a 5% contraction in the economy would reduce tax revenues by somewhere in the region of £80bn in 2020-21, albeit this would be offset by savings in interest costs following the reduction in the base rate to 0.1% and quantitative easing operations by the Bank of England.

Fiscal measures include the £12bn emergency package announced on the day of the Budget and the £20bn announced on 17 March, together with an estimate by the IFS of £18bn for further measures announced up until 25 March 2020.

The effect on the public finances estimated by the IFS is summarised in the table below.

Estimate of coronavirus revisions to the Spring Budget 2020

Financial year 2020-21Spring Budget
£bn
Economic contraction
£bn
Fiscal measures
£bn

Revised
£bn
Taxes and other income873(80)(22)771
Total managed expenditure(928)8(28)(948)
Fiscal deficit(55)(72)(50)(177)
% of GDP2.4%+3.4%+2.3%8.1%

Source: HM Treasury, Spring Budget 2020; IFS, estimates of economic contraction and fiscal measures to date, 26 March 2020; ICAEW, rough estimate of the split of fiscal measures between waiving tax and additional spending.

The IFS analysis of fiscal measures includes £10bn for the 80% job retention credit for employed workers (for which the IFS have assumed a 10% take-up), but it was prepared for the announcement of support for the self-employed. This could add another £9bn to the deficit for 2020-21.

The IFS has not included the risk of bad debts on the Government’s £330bn programme of financial guarantees and business loans or on the £30bn of second quarter deferred VAT payments. There is also no cost provision for the exposure to additional bank financing and corporate bond purchases by the Bank of England that is being guaranteed by HM Treasury.

Altogether, this would increase the deficit to £177bn, or 8.1% of GDP based on a 5% smaller economy, before taking account of the support package announced for the self-employed. The prospect of further fiscal measures in the weeks and months to come, combined with the risks from loans and guarantees, means that the prospect of a deficit in excess of £200bn is looking increasingly likely.

For more information

  • For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated Coronavirus Hub.

This article was originally published by ICAEW.