Weak British economy emerges from Covid fog

This is a simple question. Has the UK economy recovered all the land lost during the coronavirus, or has the damage caused by Covid-19 been so severe that it will take another two years of normal growth rates to restore economic activity to pre-pandemic levels?

According to the British National Bureau of Statistics, the official answer is that both statements are true, which may be surprising. Measured by the value of the goods and services produced, the actual output level in the UK in September was only 0.6% lower than the pre-pandemic level, and it is almost certain that it has now reached that benchmark. But according to another official statistics, The gap is still 3.3%, Roughly equivalent to the average growth rate of the UK in the last two years.

For most people, at this moment you will raise your arms and shout that economics has never given a straightforward answer. Policymakers, such as those at the Bank of England, tend to erase their precious cunning words for this situation and call the prospects “extremely uncertain.” Generally speaking, when the present (not to mention the future) is so uncertain, they will also try to avoid changing policies.

But this is not the time to give up and go home. After careful analysis of the national accounts of the United Kingdom and other countries, consistent stories have indeed emerged from the fog, with very clear policy prescriptions.

Going back to the first principle, we should not be surprised that there are such data discrepancies. The first thing people learn in a macroeconomics course is that there are three ways to measure the size of an economy and its growth rate.

Statisticians can measure the output of the goods and services produced, they can evaluate the expenditure required to purchase these outputs, and they can quantify the income of the people who provide the goods and services in the form of wages and profits. By definition, these three are equal, but measurement errors usually cause small differences between them in practice.

The bar chart (%) of the gap between nominal GDP in the third quarter of 2021 and the fourth quarter of 2019 shows that regardless of the measurement used, the UK's nominal GDP pandemic growth is stronger than many other countries

The current problem in the UK is that there are huge differences. In terms of output, the actual coronavirus recovery in the UK is close to that of its European counterparts in the G7, but lags behind the US. When using expenditure or income measures, the performance looks worse, with the UK economy lagging behind the G7.

Of course, none of these are photos shown by Rishi Sunak. The Chancellor of the Exchequer likes to boast that “we expect to achieve the fastest growth in the G7 this year”, forgetting that 2021 will only cover part of the pandemic.

However, actual national accounts are not sufficient to fully understand the economy, because during a pandemic, it is particularly difficult for statisticians to adjust the value of expenditure, income, and output in accordance with inflation. It is usually easier to measure the cash value of a transaction, so nominal comparisons are crucial and may be more accurate.

The bar graph of implicit price changes (%) since the fourth quarter of 2019 shows that the UK had the highest level of implicit domestic inflation during the pandemic

In the presence of data, these indicate that the UK performs better internationally in all methods of measuring the economy. Whether it is nominal output, income or expenditure, the funds flowing around the British economy are already much higher than the pre-pandemic levels, and very close to those of the United States.

Based on economic nominal growth data and estimates of actual changes in the volume of goods and services produced, the implied domestic inflation rate since the end of 2019 was slightly higher than 6%. This is the part of the national accounts that really tops the G7 rankings.

Despite the data difficulties, a truth can be seen in the fog surrounding the British economy. It may perform worse than its peers, and it will almost certainly generate more domestic inflation. This is an economy that no longer needs emergency stimulus levels.

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