The UK’s economic recovery in the private sector is not quite as robust as headline figures might indicate

The presence, and persistence, of the coronavirus is slowly becoming part of the new normal. One of McKinsey’s most popular articles in 2021 has been the one titled “When will the COVID-19 pandemic end?”. In its latest update it concludes:

Our analysis supports the view of others that the Delta variant has effectively moved overall herd immunity out of reach in most countries for the time being. The United Kingdom’s experience nevertheless suggests that once a country has weathered a wave of Delta-driven cases, it may be able to resume the transition toward normalcy. Beyond that, a more realistic epidemiological endpoint might arrive not when herd immunity is achieved but when COVID-19 can be managed as an endemic disease.

The words are carefully chosen: “toward normalcy” is not the same as “back to normal”. Across all walks of life, things have changed, sometimes (and for some people) dramatically. The economic recovery staged by most developed economies is at the same time expected (given that the biggest shocks were due to large-scale lockdowns, which are, for the time being, mostly behind us) and quite remarkable. In the third quarter of 2021, several OECD countries (such as the USA, Sweden, and South Korea) already posted GDP figures above pre-pandemic levels. On average, in countries that had results out at the time of writing, GDP in Q3 2021 was only 0.5% below December 2019.

So how does the UK compare? As far as I can tell (and it’s harder to find out than you’d think, because the UK figures do not yet show up in the OECD statistics), the UK’s output in real terms in Q3 2021 was around 1.1% lower than output in Q4 2019 — so quite a bit behind the OECD average, but no worse than Germany, and actually significantly better than for example Italy, Canada and Spain. Indeed, the black line in the chart shows the path of real GDP in the UK since December 2019.

However, comparisons like this are never as simple as they sound. One big issue is the way that statistical agencies account for public sector output. When they are estimating so called “nominal” output, valued in current prices, they generally assume that public sector output equals costs and that’s that. However, trying to tease apart what proportion of any growth (or decline) was due to a change in (quality-adjusted) volumes vs. a change in prices is much harder. In the UK, the ONS uses various methodologies to try to estimate the “real output” of the health and education sectors, for example.

As a result of the pandemic, which shut down many sectors in the market economy but incraesed activity in the health sector in particular, the public sector’s relative share of output has increased. The right hand panel in the chart shows public sector output growing from 18% of gross value added (GVA) in December 2019 to 20% of GVA in September 2021. This is not an enormous change, but it does have a substantial impact on our interpretation of GDP and GVA figures for the whole economy.

This is illustrated by the blue line in the left hand panel of the chart, which shows the evolution of GVA when the public sector is excluded. [Note: for simplicity, this excludes the public-sector-dominated industries of health, social care, education, public administration and defence. A small proportion of this activity is in fact in the private sector.] Looking at monthly figures, in September 2021 the UK’s GVA including the public sector (black line) was only around 0.6% below December 2019. However, when we strip out the public sector, the corresponding figure (blue line) is 2.1%.

Overall, then, the economic recovery in the private sector hasn’t been quite as robust as headline figures indicate. When more of the sectoral data is available for more countries, it will be interesting to update this analysis where I compared countries’ GDP performance both with and without the public sector. Back then (looking at the difference in whole-year GDP between 2020 and 2019), UK posted the 2nd largest drop in GDP in 2020 in Europe, after Spain. However, after removing the public sector from the underlying numbers, the UK came in fifth worst. Again, not a massive difference, but material and something worth understanding.