The economy is showing some growth beyond the property bubble
Nigel Williams, 1 May 2014
The preliminary GDP estimate for the first quarter of 2014 revealed growth. The economy shows gross value added during the quarter, at constant prices, £10 billion greater than a year earlier. It begins to look as if the economy is escaping the constraints of austerity. The Chancellor can point happily to a growth rate of 0.8% over the year.
GDP figures include house prices. In a concept called ‘imputed rent‘, householders are considered to charge themselves a notional amount for the accommodation they already own, which is treated as economic output or more specifically as housing services. It would thus be possible for a stagnant economy to exhibit GDP growth even if the only change were an increase in property prices. Imputed rent can be followed using ONS data series KK8T, for amounts in current prices, KL7S for constant prices and L2OF for an index.
Looking at UK estimates, imputed rent is not having a disproportionate effect. The sector accounts for around 7% of of the economy (up a small amount from 6% in 1990) and recent increases represent about 5% of the increases in total gross value added. The wider property sector has expanded over the longer term. In 1990 it was 7.5% of the economy. It has now reached very close to 10%, including a big increase in sales and rents to other people. Only when growth is close to zero does the change in imputed rent become important. When, in 2012, the UK economy was flirting with a double dip, imputed rents rose by two thirds as much as all gross value added. Without house-price inflation, there could have been more quarters of decline. However, that is more indicative of our arbitrary definition of ‘recession’, under which a large fall sandwiched by miniscule increases does not count as recession, but two consecutive falls, however tiny, do.
A look at the other components gives an indication of where the growth is coming from. The largest fall, in constant money terms, is in financial services. It is tempting to see this as a consequence of the changes to pension arrangements and payouts to flood victims hurting the insurers. However, one of the largest proportional increases was in sewerage, up 16% for the year in real terms. Some of Mr Osborne’s growth may indeed result from handling the winter’s excessive rainfall. Other hypotheses are that it is part of the gradual rebalancing of the economy or that mis-selling fines paid by the banks are fuelling an increase in household expenditure.
The quarterly manufacturing index stands at 101.8. That has reclaimed the ground lost since Q3 2011. In pre-crash terms, it is as good as Q2 1994, almost twenty years earlier. Of the £10.1bn improvement in GVA over the year, £1.2bn is attributable to manufacturing. Construction has grown by 5% adding a further billion to the economy. Wholesale and retail added an extra £2.1bn between them. Manufacturing motor vehicles added £0.2bn (up 7% on the same quarter a year before) but selling them added £0.7bn, up 10%.
Elsewhere in the services, there are largish gains in human health activities, head offices and management consultancy, employment activities and general business support. The first of these is something customers want for its own sake. The others are ancillary, assisting rather than providing. Altogether we see, even without the effect of increased property prices, a decent increase in construction and production, magnified by a larger quantity of surrounding services.