UK’s poor GDP performance rooted in weak household spending

The UK’s weakness in international economic league tables during the coronavirus crisis reflects stretched household finances and potentially wasteful public spending, according to a Financial Times analysis.

Britain’s poor economic performance relative to other countries is partly explained by differences between nations in the measurement of inflation, notably in relation to the health sector, which should disappear over time.

But the UK’s performance is also rooted in weak household spending and the government’s willingness to fight Covid-19 with an open cheque book, based on an FT analysis of the national accounts of countries that have published comparable data.

The findings will add to concerns expressed by MPs last week that the Treasury lost control of public spending amid the scramble in the first wave of the virus to establish a test and trace programme and buy personal protective equipment for health workers.

Official figures last week showed that UK gross domestic product in the third quarter in real terms was 9.7 per cent below the pre-pandemic level in the final three months of 2019: a figure more than twice as bad as comparable countries and only rivalled by Spain.

Bar chart of % change in GDP since Q4 2019 showing The UK economy has performed poorly during the pandemic after adjusting for inflation, but not in cash terms

But the GDP comparison does not look nearly as bad for the UK in nominal terms: before measured levels of national output or expenditure are adjusted for inflation.

This difference led some economists to warn that comparisons putting the UK at the bottom of international league tables were seriously flawed.

Kallum Pickering, economist at Berenberg Bank, said “beware the statistical oddities”.

He added that the UK’s data for the consumption of public services was adjusted for inflation in a different way to other countries, and until the pandemic was over “nominal comparisons may provide a better guide”.

There is no doubt that the Office for National Statistics has taken a purist’s view of the measurement of public sector output ever since a review in 2005.

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The UK statistical agency separately counts the number of hospital operations and other NHS outputs, and then the money spent, and compares the two to arrive at its estimate of inflation.

During the pandemic, this method showed output down as non-urgent operations were cancelled, although the money spent by government was considerably higher.

This reflected how big spending increases on the NHS were agreed by ministers before the crisis, and the government allocated emergency funding to prevent the health service failing during the pandemic.

ONS figures suggest that the implicit inflation rate since the fourth quarter of 2019 in the health sector has been 91.4 per cent, meaning that the cost of treating people in the UK has almost doubled.

Officials at ONS believe their measurement practices are world leading, with one saying it was doing “a semi-decent job with limited data”.

Bar chart of Implicit price change since Q4 2019 (%) showing Inflation has been extreme in parts of the UK public sector

If this was the only difference between the UK and other countries, Britain could expect a higher economic growth rate than elsewhere in the future as the public sector returns to normal once the virus wanes.

But some economists said they saw other reasons for concern about the UK in detailed international comparisons.

Samuel Tombs, economist at Pantheon Macroeconomics, said the UK’s poor economic performance could not simply be attributed to different statistical methods because household consumption was weak compared with other countries.

“The vast bulk of the underperformance can be attributed to continued weakness in household spending,” he said, noting that UK private consumption was far lower compared with the pre-pandemic peak than that in other countries whether measured in real or nominal terms.

Bar chart of % change since Q4 2019 showing UK declines in household spending are higher than in other countries

“Persistent fears about contracting Covid-19, which remained more widespread than in most other European countries in Q3, likely are to blame,” added Mr Tombs.

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FT analysis showed that with UK retail sales remaining strong through the pandemic, the weakness in household spending stems from lacklustre consumption of services. Britons notably have eschewed foreign holidays more than their counterparts in other countries.

With UK household consumption weak compared with other countries, it raises the question of which component parts of British GDP are stronger than other nations so that the overall nominal change in national income is similar.

The answer is that UK public consumption, the money spent by government on goods and services, has been growing much faster in cash terms than in other countries.

While nominal UK public consumption rose 15.6 per cent in the third quarter compared with the final three months of 2019, it increased just 3.5 per cent in Spain, 0.7 per cent in France and fell 0.1 per cent in the US.

None of these countries have had notably worse outcomes in the health sector than the UK during the pandemic.

The huge surge in UK public spending has raised concern among MPs and former government officials.

Nick Macpherson, former top civil servant at the Treasury, said there were signs of a lack of professionalism in government procurement, adding that “value for money is essential”.

Bar chart of Change since Q4 2019 (%) showing The UK is the only country to have seen a massive increase in public consumption in cash terms

But Tom Scholar, Treasury permanent secretary, rejected suggestions by MPs last week that the department had lost control of public spending.

“We’ve got exactly the same grip on spending that we would normally have,” he told the House of Commons Treasury select committee.

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Sir Tom said the health department had needed to make “very quick decisions” on the sourcing of PPE.

“We agreed with them a larger delegated budget with high delegated spending limits to enable them to do that quickly, but that was a deliberate decision taken in light of those circumstances of extreme urgency,” he added.



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