ONS admits it may have underestimated UK economic growth

ONS admits it may have underestimated UK economic growth

A misunderstanding of how to measure the telecoms sector means UK GDP growth may have been much greater, and inflation much lower, than the official data recorded, the Office for National Statistics (ONS) has admitted.

Richard Heys, deputy chief economist of the ONS, said at a seminar of the Economics Statistics Centre of Excellence in Newport, Wales, this week that the official statisticians had measured the productivity and growth of the telecoms sector incorrectly.

The problem arises in how to measure the services provided by telecom companies, such as the provision of the internet, and bundles of free calls and text messages.

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The ONS previously thought prices fell slightly in the sector between 2010 and 2015 and that output also fell.

But while the price charged by these companies, and their turnover, for their services, fell only modestly - the ONS estimated a 2 per cent fall - in reality, the price of those services fell by between 35 and 90 per cent.

While the end consumer was paying only modestly less in cash terms, the value of the services they received was much greater, meaning prices actually fell.

Because those companies produced data for their customers, which is hard to calculate, the ONS thought the telecoms sector was much less productive than it actually was, according to Mr Heys.

This means UK consumer price inflation (CPI) was much less, and may have been negative, during the years 2010 to 2015, while productivity was greater, and the total of goods and services produced was more, meaning GDP growth during those years was higher than the official statistics recorded.

The ONS is unsure about what action to take as a result of discovering this miscalculation.

As a practice the ONS does not revise CPI data after it has been produced.

James Anderson, who runs the £6.9bn Scottish Mortgage investment trust, said he thinks this trend will continue, and impact many more parts of the economy.

He said healthcare and consumer goods areas of the economy will be affected because the barriers to entry for those markets have fallen.

Mr Anderson said he believes the big pharma companies share prices will suffer as more innovative healthcare providers take market share.

He added that the contribution of companies such as Amazon and Facebook is probably deflationary, but positive for economic growth, and not being measures properly.

The veteran fund manager's view is that official GDP and inflation data will collapse and the majority of the biggest companies in global stock markets will struggle in the face of new technology and the official data won't be able to keep up.

James Carrick, economist at Legal and General, said the US economy appeared to be struggling in the late 1980s because the growth, and deflation, contributed to the economy by the advent of the personal computer, was not properly measured by statisticians.

By the early 1990s, the measurement became more accurate and economic growth picked up sharply, while inflation fell.