Strategy & economics

Is ONS data reflecting 'true' economic activity?

Richard reviews GDP data from the first quarter of 2017 and looks at how it can be misconstrued

21/08/2017

Richard Jeffrey

Richard Jeffrey

Chief Economist

In 1999, I wrote a number of articles pointing out a discrepancy between growth numbers for the economy and labour market data. While the latter were showing good employment gains and continuing strong demand for labour, the initial GDP estimate for the first quarter suggested that growth had slumped to just 0.7%, year on year. My conclusion was that growth was being significantly understated. I was called in by the Office for National Statistics (ONS) to explain myself – what justification did I have for suggesting that its GDP data was wrong. My response – that their data seemed inconsistent with other evidence we had for the economy and that it did not pass the economics smell test – was roundly (and rather haughtily) rejected. So, what do the official figures now show for that period? Well, for the first quarter growth was 3.0%, very similar to the rates reported for the previous three quarters, for the second 2.5% and for the third 3.6%.

That the ONS gets into a statistical muddle from time to time is not surprising, and revisions to historic data reflect both improved information, compared to that initially gathered, and methodological changes. But mistakes can be costly – they can result in inappropriate changes in monetary policy and they can have an adverse influence on decisions taken by companies and households. 1999 is quite a long time ago, but there are many more recent examples of the ONS publishing misleading, if not wrong, growth estimates. Remember the double-dip recession that began in late-2011 and then culminated with a negative year-on-year growth headline of 0.8% for the second quarter of 2012? The ONS now tells us it did not happen. There were not three consecutive quarters of negative growth – not even two – and the year-on-year change in activity was not negative, but a positive 1.0%. But the follow-on recession grabbed all the headlines at the time, and there can be little doubt that these negative news stories were detrimental to the recovery.

Moving the story on to 2017, we again have a contrast between the signals emanating from the labour market and the GDP growth numbers. According to the ONS, activity in the economy increased by just 0.2% in the first quarter (compared to the previous three months), followed by 0.3% in the second. This is consistent with the annual GDP growth rate eventually subsiding to 1%. Since the recession, one obvious feature of the economy has been a persistent and exceptionally weak trend in productivity. As a result, we have become inured to the contrast between strong demand for labour and dull improvements in output. But we now seem to have entered a period in which productivity growth is not just weak – it is negative. The GDP growth rates for the first two quarters of this year of 0.2% and 0.3% compare to increases in employment of 0.4% in the first quarter and (on the basis of two months’ data) a similar percentage in the second. In effect, this means that more people are being employed to produce a similar level of output. Meanwhile, both official vacancies data and independent recruitment surveys suggest that demand for labour is strong and probably rising. This contrast does not offend the nostrils quite so obviously as 18 years ago, but it still leaves me muttering the words of Victor Meldrew, ‘I don’t believe it’.

The economics profession has a problem: Brexit. Most economists (in my judgement, not less than 80%) think that growth during the period before and immediately after the UK leaves the EU will be damaged – possibly severely. So, they judge recently published growth data as confirming those expectations and tend to reject the labour market strength as an aberration. I would hesitate to suggest that ONS statisticians are also influenced by this expectations bias, but let’s just say it is not entirely impossible that currently published GDP data is understating the ‘true’ level of activity in the economy. It has happened before.

If this is the case, what might be the cause? The problem is with the bits of the economy that are under the radar. In this context, I would focus on what is happening on the fringes of the economy, where new businesses are being established at a rapid rate, particularly in the technology sector. Many of these will emerge as fully-fledged entities in future years, but they are already employing people and undertaking capital investment.

More generally, making an allowance in macro-economic data for the production and consumption of internet-based products is extremely difficult. To take one simple example, consumers spend on leisure items. However, they also spend considerable leisure time consuming ‘free’ internet-based products e.g. Twitter and Facebook. While statisticians can include the amounts spent on mobile phones, tablets and computers in consumer spending, it is very difficult to impute the benefit that people get from the consumption of social media products.

While I am not suggesting that growth in the economy is currently being underestimated to the extent that we have seen on occasions in the past, I have no doubt that there is some degree of underestimation. In part, I would ascribe this to our inability to capture what is going on in increasingly large but nebulous parts of our economies. In part, however, I have a strong suspicion that prior expectations engendered by the Brexit vote are colouring the way in which we are interpreting information.

Author

Richard Jeffrey

Richard Jeffrey

Chief Economist

Richard Jeffrey is Chief Economist at Cazenove Capital and is responsible for the macro-economic framework that supports the investment process. He joined in 2008. Since completing a Master’s degree in Quantitative Economics, Richard has worked as a professional macroeconomist and market strategist. Richard has 37 years’ investment experience and appears frequently on radio and television and writes for a number of journals. He works with a number of think-tanks and academic organisations and currently sits on the Finance Committee of Bristol University.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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