We market researchers are in the business of facts and statistics and so it was quite shocking to read this article in today’s Financial Times explaining how the statistic on Gross Domestic Product is manipulated beyond belief. The basis of the article is the huge contribution made to the economy by the service industry (business services account for 40% of GDP today and manufacturing just 14%). However, the service element of our GDP is inflated by 8% by sleight of hand. Apparently a huge slug of £83 billion is put into the GDP as an adjustment for the rent we would pay if we were renting our houses that we own! All this to make sure that we don’t fall out of kilter with Germany where more people rent their houses; and to ensure that our GDP is on a like for like basis. Talk about kidding ourselves. That is nearly one fake £1 of earnings for every £10 that is shown in our GDP.

The message is always look deep into your statistics.

Lies, damn lies and befuddlement
By Chris Giles
July 27 2007

Alistair Darling says the output of the City of London is “absolutely critical”. The chancellor is spot on.

China’s economy inspires awe owing to its industrial muscle, but the British economy is still almost as large as China’s. Our strength comes from the services sector, enabling goods to be designed, built, financed, transported and sold. We are especially good at business services, whose growth since 1992 has been stunning. Then, the Office for National Statistics says, the sector accounted for just under a quarter of the economy. By 2004, it accounted for a third. The share of manufacturing dropped from 21 per cent to 14 per cent over the same period.
Even more impressive is the expectation that the share of business services will exceed 40 per cent of the economy by the end of the decade. Its contribution has risen by an average of 1 percentage point a year since 1997 and next year the ONS will include in the national accounts a proper estimate of the value of banking services. Alone, that will add roughly 1.7 per cent to gross domestic product.

But, for all the undoubted importance of lawyers, accountants, estate agents, architects, bankers and other employees of business services companies, we do not really know with any certainty what is going on.

The statistics on business services are rather like a cheap sausage; alluring on the outside, but the more you delve into the ingredients, the more queasy you feel. Start with the cash figures for output. A quarter of the recorded output of business services, 8 per cent of GDP, is “letting of dwellings”. Anyone thinking that this is a reflection of the buy-to-let phenomenon would be wrong. Most of the £83bn contribution to the UK economy in 2004 is the ONS’s estimate of how much it would cost property owners to rent their own homes.

The reason that notional rents are included in GDP is to stop international economic comparisons being distorted by patterns of home ownership. Without the adjustment, Germany would appear richer and more productive than the UK simply because most people there rent their homes from others with a recorded cash transaction. But in estimating this huge adjustment, the ONS has to guess the notional private sector rental value of every UK home using some heroic assumptions. The upshot is that if planning restrictions damage the UK economy and force rents up, measured GDP increases, improving Britain’s apparent productivity performance relative to other countries. Rental inflation also allows the government to borrow more, since one of its borrowing rules limits debt to 40 per cent of national income. This is perverse. And at 8 per cent of GDP, it matters.

New research by Professor Jonathan Haskel of Queen Mary College, London* casts further doubt on how far we should take the statistics at face value. International rules on what counts as business investment are outdated in a service economy, he argues. Correctly measuring things such as research and development or development of new financial products as investment - because the expenditure has a future value - would raise Britain’s GDP by 13 per cent, his research suggests.

If these two examples suggest the measurement of the output of business services is difficult, even bigger problems lie in differentiating real growth from changes in prices.

The soon-to-be-introduced better measurement of financial services is a huge step forward for the ONS. But it also has the worrying aspect that measured real GDP will often go up when interest rates rise. The reason: banks have traditionally used interest rate rises to improve margins by jacking up interest rates on loans by more than on deposits. This is clearly inflation, but the measurement of inflation-adjusted interest rate spreads are so difficult that under the ONS’s chosen methodology, it will be recorded as an increase in banking activity and productivity.
Or take lawyers. A survey in Legal Week recently found that law firms had increased their hourly rates by 6 to 10 per cent. That is inflation. But it will appear as increased output in the index of services, because data shortages force the ONS to adjust law firms’ turnover for inflation using an index of the wages of estate agents, among others. In other words, pay a lawyer 10 per cent more and Britain’s output and productivity rises. But pay a doctor 10 per cent more and it is inflation, because output in health services is measured by the amount doctors do.

I have no idea whether the real growth of business services is bigger or smaller than it appears in the national accounts. But I am sure it is not as it seems and, at 40 per cent of GDP, any errors in business services can paint a highly misleading picture of the economy. The ONS is aware of the problems and is working on improvements. We should give them enough money to do the job well. In the meantime, sensible people should not treat the national accounts as gospel. It is no wonder the Bank of England’s Monetary Policy Committee is increasingly falling out and its members form their views from impressionistic surveys of businesses as much as from the official data.

from b2bsee * B2B Blog

We market researchers are in the business of facts and statistics and so it was quite shocking to read this article in today’s Financial Times explaining how the statistic on Gross Domestic Product is manipulated beyond belief. The basis of the article is the huge contribution made to the economy by the service industry (business services account for 40% of GDP today and manufacturing just 14%). However, the service element of our GDP is inflated by 8% by sleight of hand. Apparently a huge slug of £83 billion is put into the GDP as an adjustment for the rent we would pay if we were renting our houses that we own! All this to make sure that we don’t fall out of kilter with Germany where more people rent their houses; and to ensure that our GDP is on a like for like basis. Talk about kidding ourselves. That is nearly one fake £1 of earnings for every £10 that is shown in our GDP.

The message is always look deep into your statistics.

Lies, damn lies and befuddlement
By Chris Giles
July 27 2007

Alistair Darling says the output of the City of London is “absolutely critical”. The chancellor is spot on.

China’s economy inspires awe owing to its industrial muscle, but the British economy is still almost as large as China’s. Our strength comes from the services sector, enabling goods to be designed, built, financed, transported and sold. We are especially good at business services, whose growth since 1992 has been stunning. Then, the Office for National Statistics says, the sector accounted for just under a quarter of the economy. By 2004, it accounted for a third. The share of manufacturing dropped from 21 per cent to 14 per cent over the same period.
Even more impressive is the expectation that the share of business services will exceed 40 per cent of the economy by the end of the decade. Its contribution has risen by an average of 1 percentage point a year since 1997 and next year the ONS will include in the national accounts a proper estimate of the value of banking services. Alone, that will add roughly 1.7 per cent to gross domestic product.

But, for all the undoubted importance of lawyers, accountants, estate agents, architects, bankers and other employees of business services companies, we do not really know with any certainty what is going on.

The statistics on business services are rather like a cheap sausage; alluring on the outside, but the more you delve into the ingredients, the more queasy you feel. Start with the cash figures for output. A quarter of the recorded output of business services, 8 per cent of GDP, is “letting of dwellings”. Anyone thinking that this is a reflection of the buy-to-let phenomenon would be wrong. Most of the £83bn contribution to the UK economy in 2004 is the ONS’s estimate of how much it would cost property owners to rent their own homes.

The reason that notional rents are included in GDP is to stop international economic comparisons being distorted by patterns of home ownership. Without the adjustment, Germany would appear richer and more productive than the UK simply because most people there rent their homes from others with a recorded cash transaction. But in estimating this huge adjustment, the ONS has to guess the notional private sector rental value of every UK home using some heroic assumptions. The upshot is that if planning restrictions damage the UK economy and force rents up, measured GDP increases, improving Britain’s apparent productivity performance relative to other countries. Rental inflation also allows the government to borrow more, since one of its borrowing rules limits debt to 40 per cent of national income. This is perverse. And at 8 per cent of GDP, it matters.

New research by Professor Jonathan Haskel of Queen Mary College, London* casts further doubt on how far we should take the statistics at face value. International rules on what counts as business investment are outdated in a service economy, he argues. Correctly measuring things such as research and development or development of new financial products as investment - because the expenditure has a future value - would raise Britain’s GDP by 13 per cent, his research suggests.

If these two examples suggest the measurement of the output of business services is difficult, even bigger problems lie in differentiating real growth from changes in prices.

The soon-to-be-introduced better measurement of financial services is a huge step forward for the ONS. But it also has the worrying aspect that measured real GDP will often go up when interest rates rise. The reason: banks have traditionally used interest rate rises to improve margins by jacking up interest rates on loans by more than on deposits. This is clearly inflation, but the measurement of inflation-adjusted interest rate spreads are so difficult that under the ONS’s chosen methodology, it will be recorded as an increase in banking activity and productivity.
Or take lawyers. A survey in Legal Week recently found that law firms had increased their hourly rates by 6 to 10 per cent. That is inflation. But it will appear as increased output in the index of services, because data shortages force the ONS to adjust law firms’ turnover for inflation using an index of the wages of estate agents, among others. In other words, pay a lawyer 10 per cent more and Britain’s output and productivity rises. But pay a doctor 10 per cent more and it is inflation, because output in health services is measured by the amount doctors do.

I have no idea whether the real growth of business services is bigger or smaller than it appears in the national accounts. But I am sure it is not as it seems and, at 40 per cent of GDP, any errors in business services can paint a highly misleading picture of the economy. The ONS is aware of the problems and is working on improvements. We should give them enough money to do the job well. In the meantime, sensible people should not treat the national accounts as gospel. It is no wonder the Bank of England’s Monetary Policy Committee is increasingly falling out and its members form their views from impressionistic surveys of businesses as much as from the official data.

from b2bsee * B2B Blog