You can’t argue with the facts so it is a good thing that the Office for National Statistics is changing the facts and from September the UK economy will appear as much as 5% bigger than it is right now.
The sound of ringing tills
The facts are that a company’s research and development will be assessed as capital investment – £25bn extra. Kerching!
Changes to gross national income will add another £10bn. Kerching! Non-profit institutions servicing households will provide £25bn more. Kerching! The cost of producing weapons of war and aircraft carriers will add as much as another £50bn. Kerching! Kerching!
A bigger change is how savings are measured as pension rights will be included in household income so the savings ratio at a household level will be pushed up from around 5% to 10%.
There is a debit column and that includes £100bn of extra government debt to start with.
But the size of the UK economy is actually impossible to calculate – it is a bit like those figures you see on the news immediately after a hurricane hits, or there is an oil spill, or an Olympic Games or football World Cup is being planned. Nobody knows – especially within just a few hours – whether these will cost £78m or £32bn or £4.5trn but you know that somewhere a smoker has taken out a fag packet and worked a figure out on the back of it.
What difference does it make?
The ONS statistics are more analytical than that, I am sure, and I would have thought that our investment world would rely as heavily on the actual value of these figures as much as their perception whether they are voters, professional investors, consumers, overseas interests and so on.
But apparently not.
A ring-round of fixed income fund managers and asset allocators suggests that there will be no material change to investment strategy now that the UK economy is 5% bigger than it was.
David Curtin, director on the BlackRock UK fixed income team explained: "While a UK economy that is thought to be 5% bigger sounds good, for financial assets it is the rate of growth going forward that is important. Growth in business investment is crucial for both a sustainable economic recovery and for the subsequent evolution of interest rates and asset prices. It shows companies have the confidence to take advantage of the lower cost of credit or to deploy cash balances that have been built up.
"Better quality data in this area, covering more ground, and acknowledging the money that companies set aside for R&D alongside investment in plant and machinery is a positive development. With the end of near-zero interest rates now getting closer, a dataset that is not under-representing the part played by investment should also help the central bank to better navigate that potentially volatile path."
Tristan Hanson, head of asset allocation at Ashburton Investments, expressed he thoughts of his and plenty of others saying: “At the margin, it might be a positive for sterling [and] it could make a slight difference to the gilt market.”
We're doing OK
On a more positive note he said that we have seen job numbers growing for a while now but have not seen this reflected in the GDP numbers. That should now change.
“The people’s view is that the UK is doing OK,” he added, “and that interest rates will go up in the next 12 to 15 months.”
Mark Carney has already talked about the poor quality of the UK stats so here is evidence that they are improving – it now puts us in line with Nigeria, among others, whose GDP has officially been “rebased” and grown by nearly 90% to make it the largest economy in Africa.
So a 5% rise in the UK’s GDP does not have a material effect on investment strategies. But one thing it does show is that our view of the UK economy is right – according to the ONS – and we are actually doing OK.
