Is the picture of the UK economy as bleak as it seems?

Analysis: There are plenty of reasons for gloom, but the UK might not be doing as badly compared to other countries as the data suggests says Ben Chu

Many have noted that the UK economy seems to have suffered more than those of other countries this year (AFP/Getty)

The headlines talk of record UK GDP growth in the third quarter. But economic analysts could not be less impressed. And it’s not hard to see why they’re not breaking out the bunting.  

Context matters. That record-breaking 15.5 per cent surge between July and September as the country emerged from the restrictions of lockdown was preceded by a record-breaking 20 per cent plunge between April and June.

The level of economic activity in September was still around 8 per cent lower than it was in February – double the peak-to-trough size of a normal recession.

On top of this, the pace of GDP growth started to decline in August, even as the chancellor’s Eat Out to Help Out scheme encouraged people to go out and spend money in restaurants.

Moreover, September feels like a very long time ago now. More recent transactions data – which give an early read on activity – suggests the economy slowed even further in October as coronavirus cases rose alarmingly and people reined in their spending.  

And now we are in a month-long lockdown, which has fully shuttered pubs, restaurants, cinemas and much of retail. The Bank of England has pencilled in a return to contraction in the final quarter of the year as a result of the new restrictions.

On the positive side of the ledger, though, this new downturn is unlikely to be as deep as the one earlier this year. Schools are remaining open, which will mean working parents won’t face the same kinds of problems doing their work from home. Building sites and factories have been able to implement safety measures which will mean most won’t have to down tools.

The big threat though is what this stop-start economic activity is doing to our longer-term growth potential. Businesses that held back on investment earlier this year in the belief that things would get back to normal this autumn might now be scrapping their plans altogether. The investment surveys of firms certainly show a depressing picture.

Lower investment is associated with lower productivity growth, which is one of the reasons the Bank of England, along with many other forecasters, has been pushing out the date at which it thinks the UK economy will get back to the level seen earlier this year further into the decade.  

Nevertheless, the news of a successful vaccine candidate earlier this week might help counteract some of that corporate gloom.  

And there’s another area where we might be able to draw some comfort. Many have noted that the UK economy seems to have suffered more than those of other countries this year.

OECD data highlighted by the Office for National Statistics today suggest that the UK’s slump in the second quarter was larger than France’s and Italy’s and almost twice the size of Germany and America’s.  

But there are problems with this type of analysis. There are major statistical challenges when it comes to compiling GDP statistics in the current circumstances. 

We classify publicly provided education and health as economic outputs. But there’s no market price for those services. 

Should we just count inputs as outputs, so total teacher wages equate to the output of schools and similarly for the wages of healthcare workers for hospitals? Or should we adjust for the quality of the services? Common sense suggests we should adjust.

Yet that’s hard to do at the best of times, let alone in a pandemic.

How do we measure the quality of remote teaching? Or of overstretched hospitals? The point is not that this job is likely to be done better by statisticians in the UK than elsewhere, but that other countries seem to have been making different decision on these adjustments, as the economist Mike Haynes has pointed out.

“The UK appears to have been much more upfront than many other countries in taking account of reductions in output in the public sector,” he argues.

In other words, the economic picture in the UK might not be as bad, relative to other countries, as it seems.

What this underscores, of course, is the dangers of fetishising GDP as a measure of national economic wellbeing. 

The reality is that most economists, if not Conservative MPs, now agree that the best way to help the economy is to control the spread of the virus – and that means focusing on effective public health policies, rather than fluctuations in measured GDP, however dramatic they might appear.