Today’s GDP revisions – significant upward revision to Scotland’s growth

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Today the Scottish Government published revised estimates of Scottish economic growth. The updates were contained in the Quarterly National Accounts publication available here.

Normally, statistical revisions are relatively minor. But on this occasion they are much more significant than usual. Indeed, the revisions significantly revise up Scotland’s economic growth performance over the last couple of years (and bring it down in earlier years).

Whilst the changes do not change Scotland’s long-term growth profile (with GDP per head still rising by just under 2% over the last decade), it has had a major impact on the time profile of growth.

As we have written about on a number of occasions, our take was that – over the last year – the underlying growth in the Scottish economy had been stronger than the official Scottish Government data was showing us.

Today, Scottish Government statisticians have revised their methodology for measuring activity in the construction sector. The impact is pretty dramatic. Instead of falling by over 12% between the end of 2015 and the early part of 2018 as they had previously thought, the government now estimate that it has grown by nearly 4%.

In this blog, we discuss the latest data and what it means for our understanding of how the Scottish economy is performing.

Revisions to Scottish construction output

The scale of revisions to annual growth rates in Scottish construction output is shown below.

Scottish annual construction growth rates since 2010

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Output has been revised significantly in most years – note the scale of the axis on the LHS – with 2015 particularly large.

To appreciate the cumulative impact of these changes, the chart below shows the time profile of construction output since 2010.

Scottish construction series – old and new – since 2010

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The puzzling construction data has been well known for a while.

What was especially hard to understand was the fact that – according to the series that the Scottish Government had previously been using – the data was showing a sharp fall in infrastructure investment in Scotland.

The Scottish Government had hypothesised that the fall in construction was likely to be – in part – driven by a number of major public infrastructure projects coming to an end (such as the Forth Replacement Crossing and the M8 upgrade). But as we argued at the time, with the Scottish Government expanding its borrowing powers, and with capital spending growing, this was always difficult to reconcile with what was happening on the ground.

The Scottish Government’s own infrastructure programme should have shown that such spending was increasing rather than contracting – see the discussion on pages 13 and 14 of June’s Economic Commentary.

Revisions to Scottish economic growth

So what does this mean for Scottish economic growth overall?

In short, it means that growth in 2014 and 2015 is lower than originally thought, and growth in 2016 and 2017 is much stronger.

Scottish GDP growth rates

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Growth in 2017 is now estimated to be 1.3%, up significantly from the previous estimate of 0.8%. The latest quarterly figure is 0.4%, up from the first estimate of 0.2% produced in June.

Scottish GDP since 2010

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Indeed, these new figures put economic growth in Scotland much closer to our own forecasts of growth for 2017. In March 2017 for example, we were forecasting growth of 1.2% which had – until today – been viewed as overly-optimistic based upon the old data, but now is much closer to today’s revised 1.3%.

Comparisons to the UK

The revisions to growth bring Scotland much more into line with the UK in the most recent year.

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Over the year to Q1 2018 – on a quarter on quarter basis – far from lagging behind, today’s estimates show growth in Scotland of 1.3% vs. 1.2% in the UK as a whole. Of course, both are still well below historical trend growth.

Change to methodology

So what lies behind these revisions?

The Scottish Government have been transparent and acknowledged that the data source which was being used for quarterly growth gives results that are “substantially different” to the annual figures that are used to produce the revisions seen today. There is a very helpful box in the issue on page 7 of the statistical publication.

The hypothesis offered for these differences suggests that there may be some ‘construction output’ present in the quarterly data, particularly in regard to onshore and offshore windfarms, that is not present in the annual data, possibly because it is not undertaken by Scottish firms. The statisticians state that they are still investigating these anomalies with ONS.

However, in the meantime, the method for estimating the short-term growth in construction has been changed, essentially using changes in employment in Scotland and growth in GB construction activity to calculate growth for 2017 onwards.

Conclusion

Revisions are an important and necessary part of producing economic statistics. July/ August in particular is when all the data from different ways of looking at the economy are confronted and balanced to provide a more definitive, settled picture of growth and the structure of the economy. This has now been done for Scotland up to 2015.

This practice (which is the same as at the UK level, albeit a year later) necessarily means that most revisions happen once a year, which is welcome, but also can mean that things that look a bit strange may not be sorted out until one of these big revisions.

The challenge for the statisticians is that they are now trying to measure growth in 2018 from this 2015 base. This means it is important to find short-medium term measures that do the best job possible at predicting what this settled picture of the economy will look like.

Clearly, for construction, the short-term measure selected has not done a good job, and it is welcome that they have moved to a more stable approach to measure short term growth. This should hopefully mean smaller revisions in the future.

So the lesson from all this?

In the future, the Government could consider taking earlier signals that key official data is inconsistent with other measures of activity to reflect on the way series are measured in the short-medium term.

Why does this matter?

Tracking how our economy is doing is not just of interest to us economists. It also has important policy and political implications.

Even more importantly, economic and fiscal forecasting is now at the heart of determining the Scottish Government’s budget, and the official data produced by the Scottish Government is an essential part of the production of these forecasts. Growth in recent years in particular can influence forecasts of growth, and therefore tax revenues. The Scottish Government, and the Scottish Fiscal Commission, will have to consider what today’s revisions mean for the forecasting process underpinning the Scottish Budget.

Another feature of the Fiscal Framework is the additional borrowing triggered if Scotland has growth below 1% and more than 1 percentage point below the UK. This was very nearly triggered in the previous version of the data for 2017: now the UK and Scotland look much more similar.

These revisions have much larger consequences than for us economists and statisticians simply telling a story about the economy: the sums of money that now depend on these numbers is significant.

August 15, 2018