Something strange is afoot in the Office of National Statistics. Every time the Chancellor of the Exchequer takes a bow for his outstanding economic management, the ONS dumps cold water on him. The ONS has practiced this rebellious treachery for over a year, as my previous Conversation articles on the UK recovery back in May and June noted with some incredulity.
A bit of background helps understand the latest ONS outrage to Tory sensitivities. The naive person might think that economies function as follows: 1) things are produced in factories, mines, farms and offices, 2) these things are subsequently transported to wholesale and retail outlets, and 3) in person, online or by telephone the things are sold (more transport and communications involved if not collected in person). Most people think this is what economies are all about: production, transport and distribution.
In the longer term, factories, offices and related infrastructure must be repaired, replaced and expanded through investment. Financial institutions provide the vehicle for marshaling the funds needed for that investment. Produce it, move it, sell it, and investment to expand that never-ending cycle. That seems to be the approach of the ONS, which distinguishes between “production” activities and “services” (which by implication are not production).
If you think that is what economies do – produce, transport and distribute – you along with the ONS are hopelessly mired in the 20th century, back before Big Finance bought us the New Economy. Have a look at the chart below. In the second quarter of this year, UK agricultural output was down, construction was down, and all production activities together increased by a meagre 0.25% (the ONS category, “production” includes mining, manufacturing and public utilities, which to me is a suspiciously socialist sounding concept).
A quite sour outcome, you may think. Not in the least, because gross national product increased by a rousing 0.8%. How sweet it was – less to move, less to distribute and more output.
% change in UK output by sector, 1st to 2nd quarter, 2014
The growth results from the most recent quarter encapsulate the UK recovery from the Great Recession that began in 2008. Compared to the first quarter of 2008, agricultural output in mid-2014 is 6% lower, construction 11% lower, manufacturing 7% lower, and all production almost 12% lower. No prize for guessing that the entire “recovery” of GDP comes from the service sector, with business and financial services the big winner, up by more than 10% since 2008.
If it cheers you to know that finance is up and everything else down, your heart will leap at the discovery that in the measure of GDP, finance accounts for a whopping 30% of “output”, larger than manufacturing (10%), all production (14%) and all government activities combined (23%).
Percentage change in output by sector, 1st quarter 2008 to 2nd quarter 2014
A few days before the ONS made the official announcement, the BBC’s business editor Robert Peston reported that “recovery has been picking up considerable momentum over the past year” – and indeed it has. Despite (of because of?) the catastrophic financial meltdown during 2008-2009, the City is humming with activity. With investment down, that bustling activity bears no relationship to any productive activity by any reasonable definition.
In the early part of the 20th century, American publisher and author Elbert Hubbard famously wrote: “College football is a sport that bears the same relation to education that bullfighting does to agriculture.” Similarly for financial services in their relationship to the recovery of a productive economy.
By equating growth in financial services with economic recovery, George Osborne follows in footsteps of Gordon Brown. If you were hoping for a “re-balancing” of the British economy, its not here and not even on the way.