In his first speech after becoming Prime Minister, Boris Johnson stated his intention to “unite and level up,” the United Kingdom.
Gross Domestic Product (GDP) and GDP per head are widely used to measure a nation’s prosperity and income. But how accurately can they capture regional variation in growth across the UK and reflect whether or not regions are “levelling up”?
This Insight looks at whether regional measures of economic prosperity fare any better than national measures at capturing the local experience.
New regional GDP measurements
To meet the need for more timely statistics, the Office for National Statistics (ONS) recently developed a quarterly measure of regional GDP for the nine regions of England and for Wales. It was published for the first time in September 2019.
The latest data, published on 7 February 2020, showed regional growth in the second quarter of 2019, (April to June). The release provides GDP data on the countries in the UK and the regions of England. Of those, the West Midlands, North West, North East, South East, South West and Scotland had negative growth. This followed positive growth in all six regions in the first quarter of 2019. London had the highest growth in the second quarter of 2019 at 1.0%.
The ONS estimates are based on VAT returns submitted by 1.9 million business units and thus offer “unparalleled regular coverage” of local business activity. They will be published approximately six months after the end of each quarter – twice as fast as the previously published annual figures.
What’s the difference between regional and national statistics?
Regional quarterly GDP is still designated as ‘experimental statistics’ (newly developed or innovative statistics), which means they need to be treated and interpreted with some caution. The ONS warns that the data is subject to volatility and must be interpreted alongside long-term GDP trends.
Although regional GDP on a quarterly basis is an experimental statistic, regional GDP on an annual basis has been produced for several years and is a ‘national statistic’. This means the ONS deems it trustworthy and reliable. However, annual regional GDP has two major shortcomings compared to annual national GDP:
- It is not timely. The latest release in December 2019 only shows data from the previous year and this will not be updated until December 2020.
- There is a lack of historical quarterly data available. This means we have less insight into regional growth trends and cannot identify regional recessions. A recession is generally defined to be two quarters of negative economic growth, although as pointed out by the ONS to the Treasury Select Committee this is a rather narrow definition and ignores other economic indicators, such as unemployment rates.
How accurate is regional GDP compared to national GDP?
Despite the use of new ONS data, regional GDP is not as accurate as national GDP.
In October 2019, the ONS explained to the Treasury Select Committee that sample sizes for regional GDP are much smaller than that of national GDP.
Half of data collected for national GDP is directly observed. The remaining half is based on statistical techniques. For annual regional measures, only 30% is directly observed, around 50% is based on statistical techniques and the remaining 20% based on modelled estimates.
For the new quarterly regional measures, the share of data that is directly observed is likely to be higher than that for annual regional measures.
In written evidence to the Treasury Select Committee, the Welsh Government expressed a strong preference for data which is directly observed rather than modelled. It, argued for “better utilisation of administrative data,” rather than modelled data which it thought more prone to errors.
The ONS has also stressed in evidence to the Treasury Select Committee that GDP cannot in isolation measure economic prosperity. Other measures such as unemployment, income and disposable income must also be taken into account.
How do devolved nations produce GDP data?
The devolved nations of the UK produce their own measures of economic activity. The Scottish Government produces quarterly estimates of GDP which is designated as a national statistic. The Northern Ireland Statistics and Research Agency produces the Northern Ireland Composite Economic Index. This is a quarterly measure of the country’s economic performance and classified as an experimental statistic.
Wales also produces a quarterly index of production and construction. The ONS has noted that Northern Ireland’s data has a far higher proportion of observed data than the English regions, proving it possible for relatively small areas to have high-quality data.
The difficulties in defining an economic region
Although the countries of Wales, Northern Ireland and Scotland are well-defined political entities, regions within England aren’t. Robert Chote, Chair of the Office for Budget and Responsibility, has pointed out that the regions of England are the consequences of now defunct regional offices and not based on any concept of regional economies as such.
The ONS has described how English devolution has changed the demands for regional data. It said the establishment of combined authorities with elected mayors, and City and Growth Deals often means there is no longer a neat correlation between areas that regional authorities are interested in and the conventional boundaries of regions.
This means the ONS now publishes data for city regions, combined authorities and areas covered by Local Enterprise Partnerships as well as local authorities.
What next?
The ONS publishing quarterly regional GDP data marks an important change in understanding regional growth. However, its newness means there is still some way to go before it has the credibility of national GDP data.
Ed Humpherson, Director General for Regulation at the Office for Statistics Regulation has pointed out that most of the UK’s regional data is “top down.” This means it is collected for the nation as a whole and then attributed to local areas/regions. Humpherson noted that “bottom up” data, possibly collected by regional offices of the ONS may give a different take to the data.
Whatever the shortcomings of regional data, ascertaining whether the Government succeeds in its intention to “level up” the UK ultimately relies on an analysis of regional data. It is thus vital that regional data continues to improve and becomes more reliable and trustworthy.
A correction was made to this Insight on 11.03.20. It previously said that almost all data collected for national GDP is directly observed. A clarification was also made to state that the new data is likely to have a higher share that is directly observed, than annual regional measures.
About the author: Aruni Muthumala is an economist in the Treasury Select Committee.