The economy is healthier than we thought, but that brings new problems

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wo weeks ago, the estimated size of the economy jumped by about 1.7 per cent, equivalent to about £38 billion a year. This wasn’t a sudden surge in activity over the summer months, but rather a reassessment by the Office for National Statistics of how rapidly the economy had recovered after the pandemic, particularly during 2021.

This is good news, plain and simple. It helps to explain a fast recovery in tax revenues that had been out of line with tepid economic growth. It also tells a more encouraging picture on productivity, given the rebound in employment since the end of the furlough scheme.

Nevertheless, there has been a gnashing of teeth at the Treasury, in the City and among business leaders. The figures that had framed economic commentary over the past two years — which suggested the economy had not recovered its pre-Covid size and had endured the slowest economic recovery in the G7 — were eviscerated at the stroke of a statistician’s pen.

Those pens, largely in the south Wales headquarters of the ONS, have attracted criticism that, in turn, has triggered a review into how such a large data revision came about.

First, the case for the defence. It is hard to overstate the scale of flux in economic activity during the pandemic and the subsequent recovery. Measuring the value of economic activity is difficult in normal times, and that period was far from normal. That large revisions have emerged should not be overly surprising as high-quality data takes longer to collate and curate.

Second, as an economist who has had to engage with the ONS for more than two decades, I can reflect that the quality and breadth of its statistics has grown impressively over that period as it moved from an analogue to a digital organisation.

Third, revisions to the way in which statistical organisations worldwide calculate the size of an economy are under regular review and, to date, only the United States and Britain have embraced the new methodology that drove the UK’s revision. It remains to be seen what European statistical agencies find as they embrace a similar process.

Yet this defence must be tempered with justifiable criticism. In recent years the ONS has begun to comment on its statistical releases. This commentary on wages, working-age inactivity, poverty, crime and the size of the economy inevitably frames the initial reaction by the media, investors, households and businesses. That leaves the organisation open to criticism if and when large revisions come along. Investment decisions have been shaped by its commentary, despite there being a world-class economist consultancy industry in Britain able to interpret the data without the ONS doing it. Devoting time and resources to duplicating this work is starkly inefficient.

Furthermore, what was the ONS doing pushing out these revisions in a rather obscure data release on the last Friday of the school holidays? This was arguably the most consequential data release for the economy this year. It deserved to lead every business and economics news report as a counterweight to two years of rather different economic interpretation. The imbalance between the appetite for good economic news and bad economic news is of considerable frustration to many. The ONS does not need to fuel that.

Readers may ask: does this matter? It would be difficult to argue that materially different decisions on tax, spending or interest rates would have been made had the data been more accurate in recent years. It also has limited impact now on the decisions the government will face in its autumn statement or by the Bank of England this month. Yet this data has framed perceptions, especially internationally, of the British economy as something of the sick man of Europe and the developed world. This has made the cost of UK debt, the capital raised by its public and private companies and the mortgages paid by households more expensive. Those are real and costly implications of underestimating the size of the nation’s economy.

The economy is healthier than we thought, but that brings new problems

Published: The Times 11/09/2023

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