The publication of the first official GDP data for the whole of 2021 has revived a highly politicised debate about how well the UK is doing, compared to our peers in the G7. Part of me doesn’t really care, but there are some important points here.
First, the claim that the UK was the fastest growing G7 economy in 2021 is factually correct, as is the claim that independent forecasters (including the IMF) expect the UK to repeat this performance in 2022. We can argue about the significance of these claims, but both are true.
The controversy here is therefore different from that raised by other recent statements. In particular, the Prime Minister has rightly been told off by the statistics regulator for repeatedly claiming that there are more people in work than before the pandemic, which is not true (it ignores the fall in the numbers of self-employed and those not on company payrolls). This feels like a bit of a fraud, though apparently fraud doesn’t count as a crime these days either.
Second, it is equally true that the relatively strong growth of 7.5% in UK GDP in 2021 needs to be seen in the context of the relatively large fall of 9.4% in 2020.
The upshot is that UK real GDP in the fourth quarter of last year was still fractionally (0.4%) below the level in the final quarter of 2019, before Covid struck. On this basis, the UK has outperformed Germany and Italy, but is still lagging behind France and (especially) the US.
Third, though, the UK economy did grow much more quickly than expected in 2021: the average of independent forecasts for growth at the start of last year was only 4.5%, and this consensus presumably did take account of the slump in 2020.
For example, a Financial Times survey of nearly 100 economists, published in January 2021, revealed that ‘most of them expect the size of the economy not to return to pre-pandemic levels until the third quarter of 2022, despite the expectation of a strong consumer-led rebound from the rollout of the coronavirus vaccine. Increased unemployment, bankruptcies and the impact of Brexit are expected to limit the pace of the recovery.’
It therefore seems a bit rich for some economists to dismiss the rapid growth in 2021 as a ‘dead cat bounce’ when it was much better than the lacklustre recovery they had predicted. And the Conservative government deserves at least some credit for the strength of this rebound, particularly as the UK is now one of the first economies to emerge from the pandemic.
Indeed, by the end of this year, it should be even harder to be sniffy about where the UK sits in the G7 growth table. The exceptional policy stimulus in the US will fade and the recoveries in other countries, notably Germany, are already stuttering.
Finally, even I think it is a bit odd to obsess about GDP numbers anyway, especially given the measurement problems during the pandemic. The remaining differences in performance are small, and could at least partly be explained by the more accurate measurement of public sector output in the UK.
It certainly makes little sense to focus (as some do) on growth over a single quarter, as these figures are heavily distorted by the timing of lockdowns.
So, what next? The 2021 numbers are largely old news, but still good news. The monthly fall of 0.2% in December was also smaller than feared. Activity might have dipped further in January, but the UK economy at least began 2022 in better shape than many had expected. Indeed, the Bank of England’s forecasts published on 3rd February are already looking too pessimistic.
It is worth noting too that nominal GDP was 4.9% above its pre-Covid level in the fourth quarter of last year. This is a key driver of tax revenues and is the relevant measure of the size of the economy when gauging the burden of debt.
However, this might just be a last hurrah before the recovery is snuffed out by a combination of higher inflation and premature fiscal tightening. More may also still need to be done to help low-income households struggling with their energy bills.
The bounce in 2021 means that individuals and companies are already paying more tax than expected, and lower government borrowing means that the Chancellor doesn’t need to add even more to their burden. There is never a good time to raise taxes, but now is terrible – despite the recent table-topping rates of economic growth.
This article was first published by CapX on 11th February 2022