Revising up UK GDP: What are the implications?

Big data revisions

As the BBC reported, recent revisions to gross domestic product (GDP) data show that the UK’s economic recovery following the pandemic was most likely stronger than initially thought. While data revisions from 1997 to 2019 were generally small, there have been larger revisions to data for 2020 and 2021.

Indeed, annual nominal GDP has been revised up by 0.9 percentage points in 2020 and 2021, while real GDP growth (also called volume growth) was revised up by 1.7% over the two years. The real economy is now estimated to have fallen less in 2020 and rebounded more in 2021.

These revisions are substantial and highlight a welcome boost to the UK’s relative performance versus its global peers (although the UK and the US are the first to introduce a new GDP methodology; other countries might change their methodologies later). In addition, the Office for Budget Responsibility (OBR), which in its March update projected trend growth of circa 1.75% per year, will be encouraged by this stronger data, as it goes some way to explaining why the labour market has been so tight despite weak GDP.

Pre-election giveaways?

While we don’t think that the OBR will now revise trend growth up further (their forecast is already optimistic, in our view) it is likely to boost its confidence about the outlook for future tax receipts.

In turn, our preliminary analysis suggests that this could encourage politicians to push for pre-election giveaways, even if the impact of the revisions on current GDP is much smaller, so therefore has limited immediate read-across for government finances.

The OBR only saw a 50% chance of public debt falling in its March forecast and whoever wins the election likely has something of a poisoned chalice to restrain spending. However, the OBR’s latest commentary on year-to-date public borrowing showed it was £11bn lower than its March projection.

Bank of England impact

Since the spring we had an initial bounce in economic confidence surveys as the energy shock has faded, but this has been balanced by a subsequent fall in business confidence as tighter monetary conditions bite following the continued interest rate hikes from the Bank of England (BoE).

While the confidence surveys are important inputs, we don’t think the GDP data revisions will have a notable impact on the BoE’s thinking. That’s because they tend to focus on inflation and labour market data and have traditionally been sceptical of official GDP data.

If there is a positive impact of the data revisions, it would be the implication that a stronger growth forecast is possible alongside the rise in unemployment deemed necessary to cool the economy down.

The perils of forecasting

While the UK’s stronger economic performance is clearly a welcome development, the size of the data update clearly demonstrates how initial GDP estimates can be inaccurate and prone to revision, even though the media tend to treat them as objective truths.

In fact, initial GDP data are an estimate derived from a sample, which has been adjusted for seasonal factors and price changes. There is also no such thing as a ‘final’ estimate of GDP growth. All this highlights the perils in forecasting and the lack of value in making statements such as “the UK will have the lowest growth in the G10 this year”.

Inflation and growth, while both clearly important, are hard to measure. Whether they are revised or not (yes for growth, no for inflation) is a question of data policy not data accuracy. Investors are likely to be better off building a holistic picture from multiple sources than focusing exclusively on conceptually important, but empirically unreliable, estimates.