UK GDP contracted by at least 1% for all of 2011

The UK’s government funded Office for National Statistics were out today with their final figures for Q4 GDP.

According to the ONS the UK economy shrunk by a recessionary -0.3% in the last quarter of 2011 (but apparently grew 0.7% for the whole of 2011), something that regular readers of Gold Made Simple News will not be surprised to hear in the least:

Back in early June 2011 we wrote:

Whilst it isn’t a downgrade or even putting the UK ‘on watch’, it is a shot across the bows of the government’s deficit/debt reduction plans. And as we’ve pointed out before the UK is pretty much at 0 growth when measured properly. We predict that by the end of the year the UK will officially be back in recession – leaving Osbourne et-al cratching their heads as to why they can’t ‘grow’ out of the problem of too much debt.

[emphasis ours]

Back in late June 2011 we wrote:

We’ve been saying for a while now (like here and here) that not only is the UK in a recession when measured properly, but that by the end of 2011 even the official numbers will reflect this. Well today we got a report out from the CBI on retail sales growth – or lack thereof as the case maybe.

[emphasis ours]

Back in July 2011 we wrote:

That roll-over in Q2 GDP has the UK heading right back into re-recession – we stand by our predictions made here, here and here that by the end of 2011 the UK will officially be back in recession.

[emphasis ours]

Today’s figures mean that over the past 16 months the average rate of growth in the UK (using the ONS’ very own figures) has been a very recessionary -0.1%.

But once again we have to come back to one of our favorite topics, the GDP deflator (read this, this and this to get up to speed).

The GDP deflator is crucial in getting an accurate GDP figure for the UK. Here is how we explained the deflator back in May of last year:

First let’s calculate the increase in Q1 2011 from Q1 2010:

Q1 2010 GDP was £359,147bn

Q1 2011 GDP was £375,693bn

£375,693bn subtract £359,147bn is £16,546bn. So the increase in GDP from a year earlier is £16,546 or a 4.6% annual increase. But hold on, we were told today that GDP was 1.8%, according to that simple calculation the economy grew by an impressive 4.6%. So what gives?

You may have noticed but the pound today buys you a lot less than a pound of a year ago (thank you Mr King). This depreciation in the purchasing power of the pound in your pocket is better know as inflation.

We’ll leave aside for now the woeful inadequacies of using the consumer price index (CPI) as a measure of inflation – read this to get up to speed – but in its simplest terms if CPI is running at 5% annually, £100 a year ago is worth £95 pounds today, or 5% less.

To work out what our ‘real’ GDP is we simply subtract the rate of inflation over that period to give us a better measure of just how much our economy has grown.

The latest CPI figure for inflation over the past year was 4.4658% (rounded up to 4.5% when reported in the news).

So, simple math time again:

UK economy grew 4.6% over the yearYour money lost 4.4658% over the past year

So, subtracting one from the other gives us a ‘real’ UK growth rate over the past year of 0.14%. Yes you read that correctly, the UK economy is in fact growing at stall-speed 0.14%.

So as we can see in essence the deflator is used to work out what part of the GDP was due to actual growth and to subtract out the part of GDP growth that was simply down to the £ losing value.

So when inflation is high in the UK (the £ in your pocket is losing value), like it has been for the past couple of years, you would expect the ONS to use a high deflator to take account for this depreciation of the £. In short they haven’t.

So let’s see how the ONS have calculated the deflator for all of 2011:

(click for sharper image)

We can see that the ‘un-deflated’ numbers were as follows:

2010 GDP: £1,463,734tn

2011 GDP: £1,507,585tn

A simple percentage calculation tells us that in ‘un-deflated’ terms the economy grew at 3% in 2011. But the official growth numbers for all of 2011 according to the ONS was 0.7%.

So we can see that is appears that the ONS used a deflator of 2.3% (3%-2.3%=0.7%) for all of 2011. Which we can verify with the ONS’ published deflator numbers for 2011:


(click for sharper image)

Yes you really did read that correctly, in a year when CPI inflation rose to a record 5.2% and remained over 4% for the entire year the ONS would have you believe that the £ in your pocket only lost 2.3% of it’s value.

If we were to use a much more honest deflator of say 4% then in reality the UK economy shrank by 1% for all of 2011.

And before you say ‘but the ONS deflator is always much less than the CPI’ just remember that in 2008 when the CPI was last over 4% the ONS was using a deflator of, you guessed it, 4%.

In fact here is the ONS deflator side-by-side with the CPI inflation numbers going back to 2007. It’s quite clear that they track each other pretty well right up until the start of 2010 where the divergence is more than a little obvious – what on earth happened?

(click for sharper image)

This is so important because it’s the difference of headlines this morning screaming ‘UK GDP falls 1% for all of 2011’ and ‘UK GDP revised down to 0.7 for 2011’ – a massive difference we’re sure you’ll agree.

It also means we are conning ourselves that there is in any way shape or form any growth in the UK and in actual fact all that money printing by the BoE hasn’t done a thing to help the UK economy. Rather all it’s achieved is produce higher prices and allowed the ONS to goose the GDP figures.

Isn’t it time the curious case of the GDP deflator be raised with the ONS in parliament? After all its clear that from the chart above something happened at the start of 2010 that has caused the CPI and deflator to diverge in a very pronounced way.

In its simplest terms by using some arbitrary ‘deflator’ that has no connection to the CPI has been the difference on paper of the UK economy growing at a slow rate and being in a prolonged deep recession.

In short it really, really matters.

Link to this article: : http://www.goldmadesimplenews.com/gold/uk-gdp-contracted-by-at-least-1-for-all-of-2011-6454/

Posted by on Mar 28 2012. Filed under Analysis, Gold News, Markets. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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