Significant progress on the economy is still required

Article by our chair Professor Graeme Roy, first published in The Herald on 11 September 2023.

Denis Healey – Chancellor of the Exchequer in the Callaghan era – famously claimed that had he been given more accurate economic data, the UK would not have needed a bailout from the IMF in 1976.

Whether this is true remains one of the quirky unknowns of UK economic history. Subsequent data have indeed confirmed that the figures used by the Treasury overstated the scale of fiscal crisis facing the then Labour government.

But by any objective assessment, the weakness of the UK’s balance of payments, pressures on sterling and ballooning budget deficit still meant that some form of hard landing was inevitable.

Changing narratives and revisions to economic statistics have, once again, hit the headlines.

Last week, the Office for National Statistics published revised estimates for the UK economy. These increased the size of the economy by around 2% to the end of 2021.

As a result, two key “facts” that we had become accustomed to over the last couple of years have been turned on their head.

Firstly, the ONS’ revisions now suggest that by the end of 2021, the UK economy had already returned to be above pre-pandemic levels (to the tune of +0.6% instead of -1.2% as previously estimated).

Secondly, the UK is no longer the worst performing economy in the G7.

This latter narrative had been used to criticise the health of the UK economy and the direction of economic policy. What has caused such revisions?

Measuring the health of our economy is not an exact science. It is simply not possible to accurately assess every bit of economic activity, particularly with much urgency.

In 2021, the UK economy was valued at nearly £2.3 trillion. That’s a lot of activity to measure.

Rather than try to track every element of that scale, statisticians rely upon samples of firms and day-to-day economic activities that they hope are representative of the wider economy.

But as more information becomes available over time, these initial estimates will change as more data is factored in. On top of this, there are basic challenges in defining what is “growth”.

For some sectors, such as manufacturing, the concept is relatively straightforward. There, growth is a mixture of the quantity and the value of what is being produced.

If a distillery produces and sells more high-quality whisky, GDP grows. But how best to measure growth in education or the fire service? Or how to measure the improvement in GDP from the latest iPhone model, or a new social media app?

Changes to methodologies, or existing methodologies not accurately picking up what is going on in the real economy, can also therefore lead to estimates of growth in the economy being revised.

The fault, if there is one, doesn’t all lie with statisticians. As economists and commentators, we don’t help ourselves with how we communicate new data.

We present every GDP update as definitive despite knowing full well the margins of error. These errors are that much larger at turning points or times of crisis in the economy.

This is why we need to be cautious in reading too much – just yet – into last month’s -0.3% growth figures for Scotland for the three months from April to June.

Of course, a shrinking economy is a concern, but longer-term trends are more valuable.

Here the picture remains mixed. The recession forecast this time last year has, so far, not materialised. But at the Scottish Fiscal Commission we’ve stressed that this year and next are still likely to see relatively fragile growth (at best) as the cost-of-living crisis acts as a drag on economic activity.

Nothing we’re seeing in the estimates alters that view.

What does this mean for policymakers? In short, rather than focusing on short-term movements and revisions to statistics like GDP, attention is better directed at tracking the underlying health of our business base, our labour market, and productivity.

Back in 2000, the then-Scottish Executive set an objective of establishing “a dynamic competitiveness in Scottish enterprises”.

With nearly 25 years of experience, asking ourselves some honest questions about our track record on improving the dynamism and size of our business base is likely to provide much more revealing insights on the strength of our economy.

And on those measures, there is significant progress still required.

Graeme Roy is also professor of economics at the University of Glasgow’s Adam Smith Business School