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Changes to deflator calculations are set to push British GDP data higher, an ONS expert tells MNI.
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Methodological changes could add 1% to estimates of British growth over the next five years, but the economy continues to struggle with relatively low productivity, a former Bank of England Monetary Policy Committee member who sits on the Office for National Statistics Panel of Economic Experts told MNI.
Improvements to deflation calculations, which estimate the effect of price changes on measures of output, mean that the ONS now thinks the economy grew by an average 2% from 2010 to 2019, rather than 1.8%, Martin Weale said in an interview.
Going forward, that extra 0.2 percent of annual GDP "over five years gives you an extra one percent of output" and "makes us look slightly less bad relative to the rest of the world," Weale said.
The ONS has introduced double deflation, deflating both input and output indices for each industry, alongside improvements to sectoral deflators in areas such as telecommunications, with the full impact to be shown for the first time in October's Blue Book. Sectoral changes will boost growth calculations, though double deflation will only alter early estimates of each quarter's GDP, Weale said.
"The early estimates of GDP are compiled from output indicators. These will be affected by double deflation, but once the income and expenditure data have been collected GDP should be unaffected. So … double deflation affects only initial estimates of GDP," he said.
But inaccurate measures of pricing in telecoms and other sectors seem to have exaggerated the weakness of UK productivity in recent years. Charles Bean, a member of the OBR's Budget Responsibility Committee, identified the statistical change as a factor for fiscal calculations in an interview with MNI on July 7. (MNI INTERVIEW: Labour Market To Hamper UK Recovery-OBR's Bean)
The ONS has "introduced what they regard, with good reason, as better deflators for telecoms output. Prices have been falling faster than previously assumed, so you get, as a consequence, faster growth in volume," Weale said.
He noted, though, that an improvement in telecoms productivity would also automatically tend to lower productivity in industries which consume telecom services as input prices in those sectors were over-estimated and "that means their input volumes have been larger and in level terms their productivity is lower."
Revised productivity estimates remain low, he noted.
"I would certainly see the new, low rate of productivity growth as the best estimate we have of what is normal now," he said, adding that the problem appears to be deep rooted and not due entirely to the aftermath of the 2008-2009 financial crisis.
"The productivity studies I have seen for the Unites States, but I think you can see roughly the same thing in the UK, suggests that the slowdown actually started just before the crisis. Wage growth in Britain certainly slowed then," Weale said, although he added that the Covid shock is unlikely to have much impact on future productivity growth assumptions.
"Just as it is not clear why productivity growth fell 15 years ago so it is not clear that Covid need reduce productivity again … I would have thought there will be a level loss in productivity rather than a growth rate loss in productivity," he said.The ONS's UK National Accounts, the Blue Book, will be published on Oct. 29