GDP: the great imbalancing continues
On the surface of it there were few surprises from the Office for National Statistics’ latest revision of Britain’s growth figures for the third quarter of the year. The ONS left its original estimate of 0.8% growth in the quarter unchanged.
That growth rate was the strongest since the middle of 2010, and was stronger than any other G7 economy – all of which is encouraging.
However, the finer details, which we are now beginning to see in these later revisions, are less reassuring. Gross domestic product is, of course, the broadest measure of economic growth, and can be calculated in a variety of ways: by adding up the total amount we spend, the total amount we earn, and the total amount of activity (output) by Britain’s businesses. They should all, in theory, add up to the same number (after all, one person’s spending is another person’s earnings, and for that matter a shop or service’s business activity).
Last month’s preliminary GDP estimate was based on output measures – what businesses do. The breakdown showed that the biggest contribution towards growth came from the services sector (everything from hairdressers and architects to finance). It turns out, in fact, that of the services sector, the biggest sub-contribution came from “business services and finance”, which contributed a whopping 0.4% of that 0.8% growth – the biggest contribution the sector has made to GDP in at least a year and a half.*
Now, on the one hand the reality is that Britain has a big financial sector and has always relied on it for much of its economic growth. However, given the scale of the financial crisis, some will be concerned about the news that it was responsible for as much as half of the UK’s strong growth in Q3.
However, this is only one part of the story, because today we received our first breakdown of how GDP looks based on expenditure. The total growth figure is the same (0.8% quarter-on-quarter) but the devil is in the detail.
The breakdown here shows that based the biggest contribution to that growth figure came from something called “gross capital formation” – economese for businesses either investing or building up stocks of equipment, buildings and other assets without selling them. This was responsible for a whopping 1.1% of growth, with most of it coming from the build-up of inventories. While this contributes a positive figure towards GDP (because stuff is still being made), the reality is that these stocks are still unsold. The risk is that in coming quarters manufacturers and retailers simply sell off products from their stockpiles rather than making new stuff, which in turn could be a drag on future quarters’ growth.
Why is there so much unsold stuff? In large part because Britain is still struggling to export overseas. There was such a big fall in exports during the quarter that it was responsible for making GDP some 0.8 percentage points lower than it would otherwise have been.
Elsewhere, the other biggest contribution to growth was from household spending, which made up 0.5 percentage points of that 0.8% total growth number. In other words, Britain is once again highly reliant on household spending to compensate for low exports growth. The fact that we know (from other surveys) that this spending is reliant on increased borrowing seems to reinforce a broader picture: far from rebalancing its economy towards more manufacturing and more exporting, Britain is falling back upon the sectors which generated growth in the run-up to the crisis: finance and household spending.
There is no doubt Britain is recovering, bouncing its way out of depression at its fastest rate yet. The problem is the foundations upon which the recovery is built seem to be precisely the ones which landed the country in the crisis in the first place.
* We knew from last month’s GDP release that the contribution was big, but not quite this big.