UK GDP growth: why experts say it could have been much better

GDP recovery could have been stronger with better planned job support and consistent messaging, say unions and firms

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Government indecision over the furlough scheme has not helped business, experts claim. Photograph: Nathan Stirk/Getty Images

The bounceback in the UK economy in the third quarter was record breaking, but the response from business groups, trade unions and many economists was that it might have been so much stronger.

If only the government had signalled in July it would keep the furlough scheme in place until next March, as it was subsequently forced to do.

If only the gaps in the first wave of the chancellor’s rescue schemes, which left millions of people without a coronavirus safety net, had been filled.

And how much more rocket fuel would the recovery have benefited from had No 10 and the Treasury stopped bickering about the trade-offs between the health of the nation and economic growth.

With a pact in place between No 10 and the Treasury, the colossal sums of money thrown at businesses in tax breaks, loans and cash grants might have pushed the economy closer to its previous peak.

As it was, the strong increase in GDP seen in July was already beginning to wane in August and virtually flatlined in September to leave GDP almost 10% below where it was a year ago. Not even a booming housing market, which according to the surveyors body RICS pushed prices to an all-time high in October, could keep the momentum going.

It is noticeable from the Office for National Statistics figures that only five of the 20 categories used to divide up the economy were still growing in any meaningful way during September.

The biggest lift to growth came from the professional, scientific and technical services section and thankfully we can now see the benefit of this activity in the good prospects for a vaccine in the coming months, maybe even weeks.

Education, health, transport and construction were the only other parts of the economy still expanding in the autumn and they are likely to be the only ones still active going into the winter months.

Rishi Sunak’s response to the figures reveals that he recognises there was a slowdown during the third quarter and that a return to contraction is likely in the last quarter of the year. He says his emphasis is on preserving as many jobs as he can.

Q&A

What is gross domestic product (GDP)?

Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time. 

Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession. 

GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home. 

The ONS uses three measures that should, in theory, add up to the same number.

• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.

Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation.

Britain's government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period. 

The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities. 

The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December.

The figures are usually revised in subsequent months as more data from businesses and the government becomes available.  

The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington

Yet there is little recognition that a more consistent message from government was needed as the first lockdown ended and especially in the light of a consensus that the health of the economy depends on the health of the people.

Early on in the crisis the International Monetary Fund said finance ministers should do whatever it takes to protect health. The Paris-based rich nations thinktank, the Organisation for Economic Cooperation and Development (OECD), said the same.

The early studies coming out of the US show that states with lockdowns suffered the same hit to their economies as those that didn’t. Sweden, which put in place the lightest of restrictions, recorded a GDP decline of 9% in the second quarter while Denmark, which imposed the tightest restrictions of any European country, also slipped back 9%.

In each case, the difference is the number of deaths, which are higher in places that refused to lockdown tightly, and also the trust of the public going into a second lockdown, which is higher in places with fewer deaths.

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Sunak has a chance when he delivers his spending review later this month to reassure the public that he will respond to concerns about the self-employed who missed out on grants and address the needs of businesses that feel the pain of lockdowns more than most.

He will talk about the billions of pounds pledged for infrastructure projects in the north, though it is clear a vaccine provides the best route out of the current slump.

He won’t mention the bickering at the heart of government. Yet if it could stop, the slump might not be so deep, the deaths not so many, and the recovery even faster.