Friday, June 17, 2011
UK growth and financial services
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

A section in George Osborne's Mansion House speech on Wednesday, which was widely picked up, also caught my eye. This was it:

"Here is a striking fact about the British economy over the last six quarters since the recession ended a fact little understood but crucial to understanding our challenge. For five out of those six quarters, the financial sector has continued to contract.

"While our economy as a whole has grown by 2.5%, the financial sector has shrunk by 4%. Take the financial sector out of the equation, and economic growth in the rest of the economy during the recovery has actually been above its average rate of the last two decades. Put the financial sector into the equation, and economic growth has been below trend."

This struck me as surprising. Could one sector accounting for only 8% of gross domestic product - financial services - really drag down growth that much. So here's the Treasury's explanation:

Between 2009q3 and 2011q1: GVA (gross value-added) grew by 2.6% over the six quarter period, an annualised rate of 1.7%. The quarter on quarter growth rate was positive in every one of those quarters except 2010q4. GVAf (gross value added in financial services) grew by -4.0% over the six quarter period, an annualised rate of -2.7%. The quarter on quarter growth rate was negative in every one of those quarters except 2011q1. GVA-xf (excluding financial services) grew by 3.2% over the six quarter period, an annualised rate of 2.1%.

Between 1991q1 and 2011q1: The compound average rate of growth for GVA was 2.1%. The compound average rate of growth for GVA-xf was 2.0%.

So it works, although by only including the recent period of financial sector weakness in the 20-year comparison. For me there are two interesting things about this. The first is that the contribution of financial services to growth over that 20-year period was smaller than sometimes thought. It boosted growth but not by as much as is commonly supposed.

The second was the chancellor's reference to "trend". The Treasury has always maintained that trend growth is rather stronger than 2%, around 2.75%, and the Office for Budget Responsibility uses a higher figure, 2.35% until 2013, then 2.1%. 2% trend growth, if that is what the UK has, would have implications (adverse ones) for the public finances.