Data doubts

Data doubts

Last month the Office for National Statistics (ONS), the UK’s official statistics authority, published sizeable upward revisions to its GDP numbers for the last few years. The new numbers show that the UK’s recovery from the pandemic was stronger than previously thought. The original numbers indicated that the UK economy had still not recovered to its pre-pandemic size; the new estimates show the UK exceeded that threshold in late 2021.

• This is good news. These changes upend the previous narrative that the UK markedly underperformed other developed nations in recovering from the pandemic. Rather, since 2020, the UK has outperformed Germany, registering similar growth to France and Italy – though the UK remains some way behind Japan and Canada, and a long way behind the US.

• Revisions to GDP releases are common and reflect the difficulty in measuring the total amount of goods and services produced in an economy. There are several approaches to measuring GDP, but in general the process involves aggregating the value of what is produced by businesses and the public sector, net of inputs and adjusting those inputs and outputs for inflation to allow a comparison with a prior period. Some of this information is available quickly, but much, including data on personal incomes from self-assessment tax returns, emerges only with a lag.

• As might be expected during the pandemic, with huge swings in activity, the latest revisions are unusually large. Between 1992 and 2019, the average UK quarterly growth that was initially estimated at 0.4% was revised up, on average, by 0.1 percentage point to 0.5%. In 2021, the average quarterly revision was 0.8 percentage points. (UK GDP data revisions compare well by international standards. UK’s GDP revisions are some of the smallest in the developed world and take place earlier than in many other countries.)

• How can the initial GDP data have been so wide of the mark? Gathering data during a national emergency, with COVID restrictions disrupting patterns of demand and activity, was hugely challenging. Most people had other things on their minds than completing official surveys. The ONS says the changes reflect updated data and methodological changes. In particular, inventories or stocks, one of the hardest elements to measure in GDP, are now thought to have been rising, rather than falling, as previously had been thought.

• If we drill down into the detail of the GDP numbers the revisions at an industry level are even larger. Chris Giles, the Financial Times’s economics commentator, notes that basic iron and steel production was revised from an increase of 56% between 2019 and 2021 to a decline of 66%. The ONS discovered that much more of the value added attributed to steel production in the initial estimate came, in fact, from energy inputs.

• The ONS has also had problems with the regular labour market statistics, including estimates of unemployment. Earlier this month the ONS was forced to postpone publication of the monthly labour market data – an exceptional occurrence – because response rates for its long-running Labour Force Survey (LFS) had fallen to unacceptably low levels. Response rates for the LFS have dropped from 50% ten years ago to 15% in the wake of the pandemic, obliging the ONS to create a new, ‘experimental’ employment series based on payroll data from HMRC and the number of people claiming unemployment benefits. The US has had similar problems. The sample size of the Current Population Survey, the principal source of data on the US labour market, dropped sharply during the pandemic.

• This creates uncertainty at precisely the time when the Bank of England is trying to establish whether the jobs market, and wage pressures, have eased sufficiently to keep rates on hold at their rate-setting meeting this coming Thursday (financial markets currently expect the Monetary Policy Committee to keep rates at 5.25%).

• The extraordinary impact of the pandemic on the economy and declining survey participation rates have affected many countries. The ONS is responding to such challenges by improving survey methods and exploiting a wider range of data sources, including VAT data to calculate GDP, and checkout scanners and web-scraped data to measure inflation. This highlights the value in drawing on a wide range of data sources to interpret the economic environment, including financial markets, business surveys (which are not exposed to measurement error and therefore are not revised) and high-frequency industry data.

• Accurate official data are vital to the efficient operation of developed economies. As the IMF said, data is a key input in modern economies alongside land, capital, labour and energy. Getting this right requires constant change. Even with the exponential increase in the available amount of data, and with more processing power than ever, measuring the economy remains an inexact science.

• The good news is that the UK economy has recovered more strongly than previously thought. That does not alter the fact that growth has stalled this year and the outlook remains challenging. We expect the impact of past interest rate rises to squeeze demand through to the end of this year, resulting in a mild contraction in economic activity.

For the latest charts and data on health and economics, visit our Economics Monitor:
https://www2.deloitte.com/uk/en/pages/finance/articles/covid-19-economics-monitor.html

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week down 1.5% at 7,291. UK equities struggled on negative economic data and lacklustre corporate earnings reports

 Economics

• UK business activity fell for the third consecutive month in October and the forward-looking indicators dropped to the lowest level since December 2022, according to the UK flash Composite Purchasing Managers’ Index
• UK unemployment rose slightly to 4.2% in the three months to August, however, the ONS warned that the figures were experimental estimates using a new methodology
• The US economy grew by a 4.9% annual rate in Q3 2023, faster growth than economists expected
• The US Federal Reserve’s preferred inflation gauge, the core personal consumption expenditure index, fell to a two-year low of 3.7%
• The European Central Bank halted its hiking cycle after ten consecutive rate rises, keeping its key interest rate at 4%
• Euro area economic activity fell further into contractionary territory in October and to a 35-month low, according to the flash Composite Purchasing Managers’ Index
• The median London tenant spent 35% of their income on rent, according to ONS figures for the year to March 2022 – rental prices have risen sharply since then, causing a further deterioration in affordability
• The Living Wage Foundation increased the UK ‘real living wage’ to £12 an hour directly benefitting 460,000 employees – the companies adhering to the voluntary scheme have until May 2024 to meet the new minimum wage
• Turkey’s central bank increased interest by 500 basis points to 35% to fight inflation, which reached over 60% in September
• The Bank of Russia raised interest rates by 200 basis points to 15% to stave off rising inflationary pressures  
• Credit agency S&P downgraded Israel’s outlook from “stable” to “negative” due to “material escalation in geopolitical and security risks”. Markets responded by pushing the Israeli shekel to a 13-year low against the dollar  
• A United Nations report warned that the Palestinian economy, already 80% dependent on international aid, “will be blown far off course” by the Israel-Gaza conflict

Business

• Tech giants Meta and Alphabet beat analysts’ profit expectations in the third quarter as advertising revenues rebounded 
• Tech multinational Apple announced that it would follow Netflix and Disney+ in increasing its TV streaming prices by as much as 40%
• Music streaming platform Spotify returned to profit in the third quarter after increasing the price of its subscriptions and reducing costs
• US defence manufacturer General Dynamics Corp reported a 6% increase in revenue in the third quarter and said it expects artillery production to increase fivefold due to the rising geopolitical tensions
• The US government announced that it would end the steel tariffs on EU imports imposed by former president Donald Trump 
• Lloyds Banking Group, Santander and Deutsche Bank posted better-than-expected third-quarter profits as higher interest rates contributed to increased revenues
• Luxury brands Gucci and Yves Saint Laurent, part of the Kering Group, reported a sales decline of 14% and 16% in the third quarter, respectively, as the luxury industry struggles to adjust to weaker demand after three years of booming sales
• In an FT interview, Hilde Merete Aasheim, CEO of Norsk Hydro, a major European aluminium producer, warned that rising imports of Chinese electric cars into Europe could have a major impact on European aluminium demand
• Saudi Arabia’s minister for energy, Prince Abdulaziz bin Salman, said that “hydrocarbons are here to stay” after Chevron’s $53bn acquisition of Hess oil company and other megadeals in the sector
• General Motors claimed that the United Auto Workers’ strike cost them $800m in revenues, while the union announced that it had reached a tentative agreement with Ford based on a 25% pay rise over four years
• UK housebuilder Vistry announced that it would cut 200 jobs as high mortgage rates caused it to reduce full-year profit forecasts by nearly 10%
• UK prime minister Rishi Sunak assured tech companies that he would not “rush to regulate” artificial intelligence

Global and political developments

• US president Joe Biden urged Israel “to do everything in his power, as difficult as it is, to protect innocent civilians” 
• The US Treasury promised to increase efforts to “degrade and disrupt” Hamas’s financial network with new sanctions
• The Pentagon confirmed that US fighter jets launched airstrikes on two locations in eastern Syria linked to Iran’s Revolutionary Guard Corps
• Hamas and Iranian leaders arrived in Moscow last Thursday to meet senior Russian officials, intensifying geopolitical tensions
• US president Joe Biden warned China not to engage in unlawful activity towards the Philippines as any attack would invoke the US-Philippine mutual defence treaty
• Slovakian and Hungarian leaders threatened to veto further EU military support for Ukraine indicating a split emerging on EU’s unity over the Ukraine war
• Turkish president Recep Tayyip Erdoğan put Sweden’s NATO bid to a parliamentary vote, which is expected to ratify the accession
• Republican, and Donald Trump ally, Mike Johnson was elected Speaker of the House of Representatives, ending weeks of gridlock in the lower chamber
• Far-right Argentinian presidential candidate Javier Milei was endorsed by centre-right candidate Patricia Bullrich ahead of the election runoff against centre-left candidate Sergio Massa
• China and Colombia announced a further strengthening of their bilateral relationship to a “strategic partnership.”

And finally… a 14-year-old cat entered the Guinness World Records book. Bella, a cat from Huntington, Cambridgeshire, broke the world record for the loudest purr made by a living feline. The purr reached 54.6 decibels, which is the equivalent of a boiling kettle – purr-sonal best.