Can we trust UK economic data?

The latest economic signals suggest that the UK’s data service, the Office for National Statistics (ONS), may have wildly under-estimated the strength of the UK economy.

After reporting that the UK’s economy shrank by an enormous 0.7% in the three months to June, the more up-to-date independent data suggests that the ONS will have to revise its estimate higher in the coming months and the UK may not be doing as bad as some thought.

The problem is that the UK GDP data is often subject to revision and the “final” number can be quite different from the initial report.

For example, in Q3 of 2009, when the initial round of data suggested that the UK was still mired in recession even though France, Germany and the US were all growing again, GDP was revised up into positive territory, suggesting that the UK exited recession in the first quarter of 2009 along with some of its European neighbours.

You may argue that a revision from -0.4% to +0.2% is not really that much and so isn’t worth worrying about. But that is the wrong way to look at it. The UK’s economy is worth £2.5 trillion and is the 7th largest economy in the world, thus a 0.6% revision is no small chunk of change. Since the first quarter of 2005 the average revision to UK GDP statistics has been 0.4%, which is actually higher than the UK’s growth rate.

This is important. Back in 2009 the world was emerging from a deep, dark period of economic stagnation. Businesses were starting to spend money again and confidence across the global economy had started to pick up. But if you were a business leader in China or the Far East and had money to invest in Europe, you would probably scan GDP figures before you chose where to invest.

Thus, if you saw that the UK was still in recession yet France and Germany were enjoying growth you may overlook Britain, believing its economy was too weak to justify the investment. Of course, investment decisions are not that simple, but you get my point.

Some argue the second quarter GDP data is actually more like 0% (even the Bank of England thinks this), which is not great by any means, but is certainly better than a 0.7% drop. So yet again, the ONS may not be helping the UK’s future economic prospects by reporting that the economy is in its first double-dip recession for 30-years. Yet again, potential investors may be put off from investing in the UK due to all of the negative economic news that we create for ourselves.

Why is the ONS data so prone to revisions? Some argue that it is because the ONS is the first statistical agency in the EU to post its GDP figure - for example, the Eurozone estimate is released approximately three weeks after the UK’s estimate. The first estimate of growth is made after gathering just 40% of data for that quarter, hence as the revisions are released (there are two revisions that accompany the initial estimate) the economic picture in the UK becomes more complete.

So why not just hold its horses and wait for more data before releasing GDP? The ONS says that it releases GDP figures early because there is a demand to do so. Demand from where, I say? Who wants data that has proved itself inaccurate time and time again?

The ONS reports to Parliament but is a completely independent body. However, there are plenty of people dependent on it to make important financial decisions for themselves, their businesses and the country.

For example, the Bank of England decides policy based on the growth and inflation outlook for the country. If that is inaccurate then it could mean that monetary policy is not fit for purpose. In the current environment, under-reporting the strength of the economy could mean that the Bank keeps interest rates too low for too long or does more quantitative easing when the economy doesn’t really need it.

So the strong labour market in the UK, a resilient consumer and better than expected construction data could lead to a significant revision higher in the UK economic stats. While this may be a nice positive surprise, it doesn’t erase the damage done to the UK’s economy from the negative headlines in recent months.

The answer: it’s not simple. The ONS has to make its own choices - but essentially it must surely either hire more staff and gather more data more quickly at the end of each quarter to get more accurate early estimate of GDP (the extra hiring the ONS may do could also give the economy a boost) or simply release the statistics later. Investment decisions can take years to make, so delaying the GDP release for a couple of weeks could make all the difference for the investment community but also for monetary policy in the UK.