The UK actually fared much better after COVID than first thought – here’s why it matters
Comparing the UK economy with its pre-pandemic size has become an almost totemic way of highlighting its sluggish performance post-COVID.
It has certainly been a gift for Opposition politicians and in particular when – in September last year – the Office for National Statistics (ONS) produced evidence that the UK was the only economy in the G7 group that remained smaller than it was in February 2020.
However, today brought news that the UK economy actually fared better in the post-COVID period than previously thought.
The ONS unveiled a series of revisions for past GDP growth – affecting both 2020 and 2021.
It said that the UK economy contracted by 10.4% in the main pandemic year of 2020 – less worse than the 11% contraction previously reported.
And it said UK GDP grew by 8.7% in 2021 – considerably better than the previously reported growth of 7.6%.
Put together, it means that at the end of 2021 – rather than being 1.2% smaller than it was going into the pandemic as previously reported – the UK economy was actually 0.6% bigger.
Some will say that this is all just rear-view mirror stuff and does not really matter.
But it does.
Even in its most recent estimates for quarterly growth, the ONS was suggesting that, during the three months to the end of June, the UK economy remained 0.2% smaller than it was during the final three months of 2019, the last full quarter before the pandemic struck.
Carry these revisions across to the latest data though, and it means that, rather than being at the bottom of the G7, the UK’s economic recovery post-pandemic was well ahead of Germany and not far behind those achieved by France and Italy.
The Treasury was also quick to point out that, as of the end of 2021, the UK’s recovery trailed only those of the US and Canada in the G7.
Chancellor Jeremy Hunt said: “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 still to win, most of all against inflation so we can ease cost of living pressures on families. But if we stick to the plan we can look forward to healthy growth which according to the IMF will be faster than Germany, France, and Italy in the long term.”
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Economy more ‘resilient’ than expected
The ONS explained the rather dramatic upward revision thus: “These revisions are mainly because we have richer data from our annual surveys and administrative data, we are now able to measure costs incurred by businesses [intermediate consumption] directly and we can adjust for prices [deflation] at a far more detailed level.”
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 guy who has had to talk to international investors [about] why gilts and UK equities do or do not deserve [to trade at] a discount, this has cast huge doubt on recent 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 point.
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Inflation: ‘We’re getting poorer’
There has been much hand-wringing in recent months about why international investors are shunning UK assets and why some UK companies have sought to switch their main stock market listing from London to New York.
Much of that negativity will have been informed by headlines about the UK’s lacklustre growth post-pandemic.
There is a word of caution, though. One is that the national statisticians of other countries are embarking on similar revisions to their GDP statistics using something called the “SUTS” – supply and use tables – framework. This approach is reckoned to provide a more accurate assessment of how a particular industry or sector has performed and, by extension, the economy as a whole. The statistics offices of the UK and the US are, at present, the only ones to have done this.
As the ONS pointed out today: “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 important this is considered when comparing the UK with other countries and our international comparison position is likely to change once other countries fully 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 modern UK economy… it fails to do justice to the ever-growing service-side of the UK economy.
“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 doubtless argue, in response, that this is why it is seeking to finesse its methodology.
And, for now, it is helping paint a more encouraging picture of the UK economy.
The average price paid for comprehensive motor insurance rose 1% in the first quarter of the year, according to industry data indicating an easing in the steep rises seen last year.
The latest tracker issued by the Association of British Insurers (ABI) showed a 1% increase on the previous three months to £635.
That was despite the average claim paid rising 8% to reach a record of £4,800 pounds, the body said.
The ABI said the disparity showed that its members were “absorbing” additional costs and not passing them on.
Premiums hit record levels last year to reflect a surge in additional costs and claims.
The ABI reported a 23% hike in 2023, compared with the year-ago period, with £9.9bn paid out in claims.
That was the highest annual claims figure since the ABI started collecting the data back in 2013, the organisation said.
Insurers had flagged a 16% spike in the cost of paint, with spare parts also rising on average by a double-digit figure.
Other bills, largely driven by the price of energy, were up by 46%, the ABI’s report had said.
They included delays in repair and supply chains and the fact that increasingly sophisticated car technology made repairs more expensive.
The rise in premiums also reflected, it warned, a surge in uninsured drivers who did not take out policies likely because of pressure on their personal finances from the wider cost of living crisis.
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Interest rate cut hopes pushed back
The 1% rise in premiums could reflect growing regulatory pressure on the industry.
Insurers faced a further warning from the Financial Conduct Authority (FCA) in March over values placed on written-off and stolen cars.
The watchdog said it was concerned that insurance customers were only getting a better deal in settlement of their claim when they complained.
The industry has also faced accusations that drivers who can’t afford to pay for cover annually were being stung with high levels of interest.
The consumer group Which? recently found APRs being applied to monthly payments of almost 40%.
The average rate across 27 providers that charge interest and disclosed their rate was 23.37%, its report had suggested.
Which? demanded action from the FCA.
The ABI responded last week to insist that its members were taking action to address the concerns.
Its director of general Insurance policy Mervyn Skeet said of its latest tracker data: “We understand that car insurance costs are putting pressure on household finances.
These figures show how competitive the motor market is, with insurers absorbing significant cost rises but keeping prices relatively stable.
Which? director of policy and advocacy Rocio Concha said in response: “While it’s encouraging to see the price of premiums steadying, they still remain eye-wateringly high and prohibitively expensive for many drivers.
“It won’t be lost on motorists that premiums increased by a quarter in 2023 compared to 2022.
“To make matters worse, some who can’t afford to pay for their annual cover all in one go are being stung with interest on monthly repayments of up to nearly 40 per cent, which can add hundreds of pounds onto the final bill.
“The regulator needs to get a grip of the issue quickly by making clear that insurers squeezing customers paying monthly with excessive interest rates to make higher profit margins than those paying annually does not meet fair value requirements, and setting deadlines for firms to fix this.”
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