Strategy & economics

Encouraging signs for growth in the UK

Richard Jeffrey, Chief Economist, writes on productivity gains in the UK and the effects that misreading of data can have on the economy

29/01/2018

Richard Jeffrey

Richard Jeffrey

Chief Economist

I have written on many occasions about the persistent understatement of growth in the UK economy by the Office for National Statistics when it publishes its initial estimates for any particular quarter or year. It is not absolutely the case that GDP growth is always under-recorded, but is normally the case. And it normally takes two to four years before the truth emerges. The most dramatic misreading of growth by the ONS in recent times relates to 2012. For that year, the ONS initially reported that the economy had totally stagnated – that there was no growth. Now, to a slight background cough of surprise, we are told that growth was 1.5%.

Just in the last few weeks, I have seen wider recognition of the problem. And this has been part of a Damascene-like realisation that the economy has not been performing as badly in the period since the Brexit referendum as many commentators and national institutions predicted. While there is evidence that the balance of growth has changed (which is no bad thing), the overall momentum of the economy has been maintained; indeed, I would not be surprised to see the numbers eventually showing that growth improved in 2017 compared to 2016.

Having a reasonably accurate assessment of conditions in the economy does matter, since it will inform and influence both business and policy makers in the decisions they are taking that will help determine the future performance of the economy. Of particular importance at the present time is the impact that growth revisions have on our analysis of productivity trends. Estimates of employment trends tend not to change significantly through time, partly because the numbers are compiled from a range of sources. Indeed, the available information relating to the state of the labour market is probably rather more reliable than a lot of other macro data. As a result, changes in GDP and output estimates tend to feed through one-for-one to productivity changes.

There is little doubt that recent improvements in productivity have been substandard when measured against established longer-term trends. I have written previously why this might be the case. However, the problem might not have been as acute as we believed and, more to the point, might now be lessening. After including my estimates for growth in the final quarter of last year, I judge that productivity improved by slightly under 1% during the year. However, if growth is revised higher, then the gain in productivity may have been closer to 1.5%. While this would still fall short of the near-2% that has been seen historically, the UK would be on the right track.

In a situation of near-full employment and slowing growth in the size of the work force (attributable both to demographics and lower net immigration), the overall growth in the economy is going to be increasingly determined by the trend in output per person employed – productivity. And if our growth is not to be capped at a somewhat pedestrian, sub-2% rate, then we have to see a sustained acceleration in output per person. So, to the extent that 2017 is likely to show a meaningful pick-up once we have fully revised data, I for one am feeling rather encouraged.

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 Schroders 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. 

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