Today’s more detailed GDP figures for Q1 of 2016, published by the Office for National Statistics, confirm that the UK economy has indeed slowed, but provide absolutely no evidence that the slowdown is due to fears of Brexit. Rather, they demonstrate – as we have been saying time and again over the last 6 months – that the economy has been decelerating for well over a year – thanks mainly to home-grown self-imposed Osbornian austerity, together with some wider international weakening. Compared with a year ago, in Q1 GDP was up by just 2%. This chart tells the tale:
Back in late April, George Osborne had already claimed that fears of Brexit were “weighing on our economy”. This table shows however that this is not so. It is true that total investment (GFCF) has relatively stagnated, but this too goes back a year, as the next chart shows:
So yes, the slowdown in investment has lasted for a year, and the last quarter shows a slight increase.
So no, whatever impact Brexit might have, if the people vote to Leave, the slowdown we are experiencing cannot be laid at the Brexit door.
Nominal GDP, deflation and low inflation
In Q1, real GDP (after allowing for in/deflation) was up 0.4% on the previous quarter, and up just 2% on a year before (Q1 2015).
Nominal GDP (i.e. in current prices including in/deflation) rose 0.7% from Q4 2015, and at an annual rate of 2.5%. This is a little higher than over the previous 6 months, but far short of the OBR’s normal assumption of nominal growth of 4% per year (they have estimated this now at 3.6% for 2016/17, but then back to 4% – see below). Remarkably, over the last two Quarters of 2015, nominal GDP was virtually the same as real GDP, a situation we have hardly ever seen in post-WW2 history.
We have previously commented that this has an impact on the likely level of tax receipts, now and into later years. The OBR were extraordinarily late in spotting the decline. Here is a Table from my earlier article “George Osborne’s severe mission failure” (PRIME 28th February 2016) which I have updated to show the OBR’s latest projections, compared to their earlier ones, and our own pre-budget estimates from February 2016:
What we see is that on the OBR’s calculations, the size of the UK economy – in nominal terms – in 2018/19 is likely to be about £50 billion smaller than it had itself estimated as recently as November 2015. That is around 2.5% of GDP, not a small margin of error. It shows just how vulnerable and divergent official estimates of economic activity for a period of years ahead can be, even coming from the same source!
In fact, in their November 2015 Economic and Fiscal Outlook, para. 3.62, the OBR were still assuming nominal GDP growth of 3.6% in calendar year 2015:
“We expect annual nominal GDP growth to fall back from 4.7 per cent in 2014 to 3.6 per cent in 2015, largely reflecting slower quarterly growth of nominal GDP in the second half of 2014 that affects the annual growth rate in 2015”
This is a bizarre explanation, since it says no more than that the slowdown in nominal GDP is due to the slowdown in nominal GDP!
While low inflation or deflation means that government spending is likely to be less than estimated (assuming the same volume), it also means that government income will be well down – and by a greater percentage as the government plans on an increased tax take.
We also see that in Q1 in volume (“real”) terms, household consumption rose fairly rapidly (3.5% annual rate), but in terms of spending, the increase is more modest (2.6% annual rate). We also see that despite an increase in the number in employment, the “compensation of employees” (measured in current £) rose by only an annual rate of 3.3% in both Q4 2015 and Q1 2016. This confirms the trend of recent pay data showing that average real pay is only increasing – very slightly, and has not got back to pre-crisis levels.
The large majority of economists seem to hold the view that (at least a modest) deflation is good for the economy. There are of course many factors, but the experience of the UK over the last year is that this has not proved so. The economists got it wrong. The real economy has slowed precisely at the time that we have flirted with deflation. Deflation itself reflects in major part a lack of demand, and the lack of demand leads to weak economic activity.