UK GDP for Q2 2014 has been revised up by 0.1 percentage point to 0.9 per cent, but economists warn the data reveal the economy is still weak by historical standards.
According to Office for National Statistics data UK GDP increased by 3.2 per cent during the 12 months to Q2 2014. The ONS now estimates that GDP in the second quarter of this year is 2.7 per cent higher than the pre-economic downturn peak of Q1 2008.
The new estimates also show that the UK economy fared less badly during the financial crisis than previously thought, with a peak-to-trough decline in GDP of 6 per cent. It had previously been estimated that the decline was 7.2 per cent.
The economy is now thought to have first exceeded its pre-crisis peak in Q3 2013, rather than in the early part of this year.
Changes to the way the UK measures GDP ushered in by the EU have caused substantial revisions to past estimates, making comparisons on everything from the deficit to underlying growth difficult. Economists warn that under the improved statistics all is not necessarily rosy.
Scott Corfe, head of macroeconomics at the Centre for Economics and Business Research, said: “The new data, which is presumably a more accurate reflection of the actual state of the economy than previous estimates, may help partially explain why unemployment rose less sharply than anticipated during the crisis.”
However, he warned there are some “major causes for concern” in the latest data, principally around the UK’s trade position with the rest of the world.
Mr Corfe said: “We have been arguing for some time that the current account deficit – a measure of the UK’s trade position – could start to significantly hold back economic growth prospects and lead to a sterling depreciation in the future.
“The latest data suggest that these concerns are justified, with the deficit failing to narrow. The deficit was £23.1bn (5.2 per cent of GDP) in Q2 2014, up from £20.5bn (4.7 per cent of GDP) in Q1 2014.”
“With the UK’s largest single trading partner, the eurozone, struggling to grow, an improvement in exports is unlikely to rectify the current account position anytime soon.
“Income from overseas investment is also being held back by economic weakness in other advanced economies. If the current account position deteriorates further over the coming quarters then a sterling sell-off could be on the table. It’s increasingly becoming a question of when, not if.”
Samuel Tombs, senior UK economist at Capital Economics, added that today’s significant revisions “do not change the fundamental picture that the economy’s performance since the recession began in 2008 has been very weak by historical and international standards”.
He said: “It remains the case that it took longer than after any of the recessions in the 20th century for output to return to its peak. And while the rise in GDP in the UK since its pre-recession peak is now the fourth (rather than fifth) strongest in the G7, this relative improvement is largely because most other G7 nations have yet to implement the new ESA10 rules [which have brought about the changes to GDP data].
“What’s more, the revisions are unlikely to have any major implications for monetary or fiscal policy.
“Past precedent suggests that the MPC and OBR will interpret the stronger GDP figures as a signal that the economy’s supply side was less badly damaged during the recession than previously thought, and so will revise up their estimates of potential GDP by a similar amount, thus leaving their all-important output gap estimates largely unchanged.”
