The UK truly fared significantly better after COVID than first thought – here is why it issues

Comparing the UK financial system with its pre-pandemic dimension has change into an nearly totemic means of highlighting its sluggish efficiency post-COVID.

It has definitely been a present for Opposition politicians and particularly when – in September final yr – the Office for National Statistics (ONS) produced proof that the UK was the one financial system within the G7 group that remained smaller than it was in February 2020.

However, as we speak introduced information that the UK financial system truly fared higher within the post-COVID interval than beforehand thought.

The ONS unveiled a collection of revisions for previous GDP progress – affecting each 2020 and 2021.

It stated that the UK financial system contracted by 10.4% in the primary pandemic yr of 2020 – much less worse than the 11% contraction beforehand reported.

And it stated UK GDP grew by 8.7% in 2021 – significantly higher than the beforehand reported progress of seven.6%.

Put collectively, it implies that on the finish of 2021 – relatively than being 1.2% smaller than it was going into the pandemic as beforehand reported – the UK financial system was truly 0.6% larger.

Some will say that that is all simply rear-view mirror stuff and does probably not matter.

But it does.

Even in its most up-to-date estimates for quarterly progress, the ONS was suggesting that, in the course of the three months to the top of June, the UK financial system remained 0.2% smaller than it was in the course of the closing three months of 2019, the final full quarter earlier than the pandemic struck.

Carry these revisions throughout to the most recent knowledge although, and it implies that, relatively than being on the backside of the G7, the UK’s financial restoration post-pandemic was nicely forward of Germany and never far behind these achieved by France and Italy.

The Treasury was additionally fast to level out that, as of the top of 2021, the UK’s restoration trailed solely these of the US and Canada within the G7.

Chancellor Jeremy Hunt stated: “The fact that the UK recovered from the pandemic much faster than thought shows that once again those determined to talk down the British economy have been proved wrong.

“There are many battles nonetheless to win, most of all in opposition to inflation so we are able to ease value of dwelling pressures on households. But if we persist with the plan we are able to sit up for wholesome progress which based on the IMF will likely be sooner than Germany, France, and Italy in the long run.”

The ONS explained the rather dramatic upward revision thus: “These revisions are primarily as a result of we now have richer knowledge from our annual surveys and administrative knowledge, we at the moment are capable of measure prices incurred by companies (intermediate consumption) straight and we are able to alter for costs (deflation) at a much more detailed degree.”

Part of the revision can be explained by the fact that the ONS now has a more detailed understanding of how much people were being paid in the 2021-22 financial year following the availability of more up-to-date information from HM Revenue & Customs. More up-to-date information on household spending during 2021, for example on telecoms services, has also been incorporated into the assessment of GDP.

Put together, these led to some pretty dramatic upgrades in parts of the services sector, which makes up four-fifths of UK GDP. The ONS now thinks the services sector as a whole grew by 10.9% in 2021, way ahead of the previous estimate of 7%, which is a pretty extraordinary upward revision.

The biggest contributors to that, according to the ONS, was from the wholesale and retail trade, and repairs to cars and motorcycles in particular.

Another contributor was accommodation and food services, which is now reckoned to have grown by 31.3% in 2021, up from the previous estimate of 30.9%.

Clearly the rush among Britons to eat out and stay in hotels after lockdowns ended was even bigger than previously thought.

Other sectors where activity was stronger than previously assumed were professional scientific and technical activities and healthcare services.

The commercial property sector, previously thought to have contracted during the year in question, is also now reckoned to have enjoyed growth.

These revisions are really important in terms of how we view the UK’s economic performance.

As Simon French, the chief economist and head of research at the investment bank Panmure Gordon was quick to note, the entire UK economic narrative, post-pandemic, has just been revised away. All those headlines about the UK economy not being back at pre-COVID levels, or bottom of the G7, are now obsolete.

He added: “But as a macro man who has needed to speak to worldwide traders [about] why gilts and UK equities do or don’t deserve [to trade at] a reduction, this has solid big doubt on latest investor conclusions.

“I may be biased but this deserves to lead every UK economic and business story today – to provide symmetry to the coverage that the sluggish post-pandemic recovery that has shaped investor/business/household sentiment.”

That is a key level.

There has been a lot hand-wringing in latest months about why worldwide traders are shunning UK belongings and why some UK firms have sought to modify their important inventory market itemizing from London to New York.

Much of that negativity can have been knowledgeable by headlines concerning the UK’s lacklustre progress post-pandemic.

There is a phrase of warning, although. One is that the nationwide statisticians of different international locations are embarking on related revisions to their GDP statistics utilizing one thing referred to as the “SUTS” – provide and use tables – framework. This strategy is reckoned to supply a extra correct evaluation of how a selected trade or sector has carried out and, by extension, the financial system as an entire. The statistics places of work of the UK and the US are, at current, the one ones to have achieved this.

As the ONS identified as we speak: “This means that the UK has one of the most up-to-date sets of estimates for this period of considerable economic change. Other countries follow different revision policies and practices, which can result in their estimates being revised at a later date.

“It is necessary that is thought-about when evaluating the UK with different international locations and our worldwide comparability place is prone to change as soon as different international locations totally confront their datasets over time.”

And there is a broader point to make, too, which is that it is debatable whether GDP is that meaningful a measure, these days, of how the economy is doing and how all of us, as individuals, are living their lives.

As Savvas Savouri, economist at the hedge fund manager Toscafund and one of the Square Mile’s smartest economists, has told clients in the recent past: “GDP is a nonsensical measure of the trendy UK financial system … it fails to do justice to the ever-growing service-side of the UK financial system.

“After all, measuring the production of textiles is very much easier to do than capturing the volume and value of coding for gaming, e-commerce and e-finance, architectural design, writing of legal contracts, insurance underwriting, academia to students from overseas and so forth.”

The ONS would likely argue, in response, that for this reason it’s searching for to finesse its methodology.

And, for now, it’s serving to paint a extra encouraging image of the UK financial system.