The ONS has published updated and indicative estimates of GDP, which show that the economy was larger than we previously thought in 2020 and 2021, though our estimate for the UK’s monthly and quarterly economic trends is broadly unchanged. Craig McLaren explains what’s led to this brighter picture.
The UK economy has recently been through unprecedented times, first with the COVID-19 pandemic in 2020 and 2021 – that led to the biggest fall in GDP ever seen – followed closely by the impact of the Ukraine War from 2022 – which has seen prices rise at their fastest rate for over 40 years.
As we have often pointed out over the last few years these significant real-world events have added increased levels of uncertainty around initial estimates of GDP.
In the short term, we have good information about businesses’ turnover and inflation from our monthly surveys, but we have less reliable information about the size and increase in costs they are incurring; which is known as ‘intermediate consumption’.
In more normal times, this isn’t a problem, as the ratio of costs to turnover that businesses face remains relatively stable, and so keeping them constant in our early estimates works well. Given, though, the unprecedented nature of the last couple of years, we did use some experimental VAT data on business purchases to adjust industries where the VAT data suggested differing costs in 2021 from 2020.
However, our updated estimates, published today, uses information from our Annual Purchases Survey and Annual Business Survey. These surveys provide more detailed information on the costs facing businesses but take us a while longer to collect. These show that in 2021 many businesses in the manufacturing sector actually incurred even more costs than we initially assumed. The picture in the services sector is more complex, though, with these new data showing the price of wholesale and retail services was lower than previously estimated, while the amount of health services provided was higher than previously thought.
Separately, we have also updated our estimates for the amount of stock owned by UK companies, known as ‘inventories’ in 2020. This showed that the total stocks held by UK manufacturing and mining companies fell less than we first thought, reducing the scale of the fall in total GDP in 2020.
Producing estimates of GDP in unprecedented times, when much of these data we need to produce complete national accounts are not available for a couple of years after the event is clearly a challenge. We are among the first of our international colleagues to update our initial estimates with more detailed data.
We will continue to review our assumptions, methods and sources to produce the best estimates of changes in the UK economy as soon as possible.