Changes in output

Table 1.1 presents index numbers of output at con­stant factor cost,³ recording changes in the volume of output for the various sectors. Data for GDP at factor cost are also given so that comparisons can be made between the individual sectors and the economy as a whole.

In the primary sector, agriculture, hunting, forestry and fishing grew slower than GDP between 1964 and 1979. After 1979 this sector’s output was more influenced by the agricultural policy of the European Union than by the UK business cycle. So agricultural output grew strongly through the recession of the early 1980s and, just as perversely, fell during the upswing of 1994 and 1995. Within mining and quarrying there are two very contrasting industries: coal, which is the only industry where output has fallen throughout the period, and the oil and gas

Table 1.1 Index numbers of output at constant prices (1990 = 100).

Sources: ONS (2010a) Annual Abstract of Statistics; ONS (2010e) United Kingdom National Accounts, and previous issues.

extraction industry which grew very rapidly in the late 1970s and early 1980s. Coal output fell by just over half between 1964 and 1979. High real energy prices after the 1973 and 1979 oil price ‘shocks’ improved the prospects of the coal industry, but at the same time made feasible the rapid exploitation of high-cost North Sea oil, which was increasingly to act as a substitute for coal. Coal output fell by around 30% between 1979 and 1990 and then by over 90% between 1990 and 2009 as the privatized electricity generating companies made their ‘dash for gas’. Oil and gas extraction had peaked at an index number of 137 in 1987 before falling to the 100 in 1990 shown in the table (the halving of the oil price in 1986 may have been a factor in this decline). After 1990 the offshore oil and gas extraction industry enjoyed a remarkable revival in which output increased by nearly 76% over the 11 years to 2001 to register an all-time high as new techniques enabled more oil and gas to be profit­ably produced both from existing fields and also from new smaller fields which might previously have been uneconomic. However, between 2001 and 2009 output of the sector has fallen to only 20% higher than 1990 as problems with domestic supplies began to emerge.

In the secondary sector, 1973 is again a significant date. Output from both manufacturing and construc­tion rose steadily between 1964 and 1973 (at annual rates of 2.9% and 1.8% respectively), but between 1973 and 1979 output from both these subsectors actually fell, and fell still more sharply in the recession between 1979 and 1981. Manufacturing output fell by as much as 12.9 points or 14.2% in this recession. The recovery after 1981 took manufacturing output to a new peak by 1990 which was just 5.4 points above the previous peak 17 years earlier in 1973. All of that gain in output was then lost in the recession­ary years of 1991, 1992 and 2007. These forces left manufacturing output in 2009 very similar to the level of 1973.

Output in the construction industry follows a similar path to that in manufacturing up to 1981. The industry was then a leading sector in the boom of the eighties, far outstripping manufacturing, with growth of almost 40 points or 66% between 1981 and 1990 (i.e. 5.7% per annum). Output of the industry then fell by 7.7% between 1990 and 2001 before growing strongly between 2001 and 2006, then declining in the recessionary period from 2007 onwards to be only 5% above the 1990 figure in 2009. Electricity, gas and water supply shows none of the volatility of construction. The long-run growth of output in this sector tends to keep up with that of GDP and does not always become negative during recessions.

The index of output for the production industries (see earlier definition) is presented in the last row of Table 1.1. We see that industrial production grew between 1964 and 1973 by 18.8 points, an annual rate of 2.9%, but then grew more slowly between 1973 and 1979, and fell sharply between 1979 and 1981. This definition includes the contribution of North Sea oil and gas, which helped to compensate for the sharp decline of output in manufacturing since 1973. Exploitation of a non-renewable natural resource is, however, more akin to the consumption of capital than it is to the production of goods and services. The North Sea provided the UK with a once- and-for-all ‘windfall’ gain in output over other less fortunate countries. To some extent this masked the full extent of the decline in non-oil industrial output which fell by 14.6% between 1973 and 1981, result­ing in non-oil GDP being 2.5% lower in 1981 than in 1973.

After 1981, growth of UK industrial output resumed, led by the recovery of manufacturing out­put, and averaged 2.9% per year through to 1988. Industrial output in the 1980s was again growing at the rates of the 1960s, and changing oil output did not significantly affect the index.

International comparisons highlight the failure of British industry during the 1960s and 1970s. Industrial production in the industrial market eco­nomies (OECD) grew at a weighted average of 6.2% per annum between 1960 and 1970, slowing to what in the UK would still have been regarded as a healthy 2.3% per annum between 1970 and 1983. So British industrial output in the 1960s grew at less than half the average rate of the industrial market economies as a whole, and during the late 1970s contracted as industrial production in these countries continued to grow. However, during the 1980s the growth of UK industry relative to the rest of the OECD clearly improved. The OECD index of industrial production shows growth in the UK of 47% for the period 1981-2005, against an average growth for the whole OECD of 53%. Since 2005 there has been a fall in industrial production of 12.4% in the UK, faster than the fall of 7.4% recorded in the OECD over the period 2005-10. We can conclude that the UK’s rate of relative decline as an industrial producer has been greatly reduced since the 1970s but has not yet been halted.

In the tertiary or service sector, Table 1.1 shows that output grew in every subsector throughout the whole 1964-79 time period. Even during the reces­sion of 1979-81 output fell in only two of the seven subsectors. The pace-setters have been the commu­nications, financial services and real estate sectors. The thrust of government policy since 1979 under Margaret Thatcher had ensured that public sector services grew more slowly than the rest of the sector. However, since the late 1990s and throughout the first decade of the millennium, public administration along with defence and social security as a group grew relatively rapidly, rising by 15.8% on the 1990 base figure.

The contrast in growth experience between the service sector and the industrial sector has changed the share of total output attributable to each (see Table 1.2). However, even in the service sector, growth of output in the UK at 2.9% per annum between 1964 and 1981 lagged behind the average for the industrial market economies which was 3.9%. Between 1981 and 2009 UK service sector growth was, at 3.1% per annum, a relative improvement as the average for the industrial market economies had fallen to a similar figure. The poor UK industrial per­formance outlined above may also have contributed to this relatively poor service sector performance, since many services are marketed to industry or to people whose incomes are earned in industry. A growing industrial sector generates an induced demand for the output of the service sector.

The GDP can be obtained by aggregating the vari­ous sectors outlined above. It grew from 58.7 in 1964

Table 1.2 Percentage shares of GDP at factor cost.*

Note: Calculated from GDP at factor cost, at current prices and unadjusted for financial services and residual error.

Source: ONS (2010e) United Kingdom National Accounts, and previous issues.

to 80.0 in 1979, i.e. by around 36%. This represents an average annual growth rate of about 2.2% between 1964 and 1979, slowing to 1.1% between 1973 and 1979. The GDP actually declined between 1979 and 1981 by 4.4% whilst the OECD average GDP continued to rise slowly. By international stan­dards the UK growth performance was poor between 1964 and 1981. For instance, the weighted average annual growth rate for industrial market economies, our key trading partners, was 5.1% between 1960 and 1970 and 3.2% between 1970 and 1979. In the eight years following the recession of 1981, UK real GDP grew at an average of 3.3% per annum, well above the UK rates of the 1960s, and above the OECD average of 3.1%. During the 1980s, therefore, the UK’s relative economic decline was halted, but even at these higher rates its reversal was likely to be a slow process. Events since 1988 have confirmed this view, with UK real GDP growing at 1.9% per annum between 1988 and 2009 compared to the OECD average of 2.0%.