A better way to measure the recovery? - Capital Economics
UK Economics

A better way to measure the recovery?

UK Economics Update
Written by Andrew Wishart

A new type of recession requires new tools to measure it. It has become clear that the activity PMIs will be of little use in gauging the extent and pace of the recovery from the coronavirus crisis. Our new “Capital Economics BICS Indicator”, which is based on experimental data published by the ONS, may prove an indispensable tool in measuring the recovery in close to real time.

  • A new type of recession requires new tools to measure it. It has become clear that the activity PMIs will be of little use in gauging the extent and pace of the recovery from the coronavirus crisis. Our new “Capital Economics BICS Indicator”, which is based on experimental data published by the ONS, may prove an indispensable tool in measuring the recovery in close to real time.
  • The PMIs are not much use in gauging the pace of the recovery. Admittedly, back in March they did their job by capturing the sharp drop in activity. But since then they have been a poor guide to GDP. They underestimated the size of the decline in GDP in April. (See Chart 1.) And in May, by remaining below 50, they suggested that the economy was still contracting even though it expanded. This casts doubt on their ability to gauge the extent of the recovery in the coming months.
  • Our CE Mobility Trackers might do a slightly better job at measuring the level of activity. They suggest that so far the UK has recovered more slowly than other economies. (See here.) But while they alert us to increased movement of people, the degree to which this relates to economic activity is far from clear. (See here.) The upshot is that it has been tricky to get a useful early read on monthly GDP before the figures are released six weeks after the end of each month.
  • The Business Impact of Coronavirus Survey (BICS) from the ONS might be the solution. The survey asks a representative sample of 25,000 businesses about their financial performance every fortnight and the results are released just 10 days after the survey period.
  • This could be more accurate than the PMIs and our Mobility Trackers. The PMI only asks whether activity has increased or fallen month-on-month, not by how much. But the BICS asks firms to quantify how revenue compares to normal (i.e. down by more than 50%, down by 20-50% etc.). It should therefore be a much better guide to the level of GDP. And as the data are gathered using a similar approach to the official GDP figures, the survey should overcome the shortcomings of the Mobility Trackers too.
  • We have used the BICS survey to produce a new “Capital Economics BICS Indicator”. It takes the BICS data on the level of revenues compared to normal for those firms currently trading and merges it with some other BICS data on the share of firms that have temporarily paused trading due to lockdown/social distancing measures (since they are closed we assume their revenues are 100% below normal). Doing this produces a single indicator akin to the overall level of business revenues compared to normal.
  • The initial results are promising. The indicator appears to have captured the big fall in GDP in April and the small 1.8% m/m rise in May. (See Chart 2.) So far, the relationship is based on only a few data points. So it’s possible that the indicator won’t be as fruitful as we hope. We will know more when June’s GDP data are released on 12th August. But for what it’s worth, the CE BICS indicator points to a 7% m/m rise in GDP in June and suggests that in the first half of July GDP was still about 15% below pre-virus levels.
  • Our view remains that after a swift initial rebound the recovery will peter out and that GDP won’t return to its pre-virus level until 2022. The CE BICS Indicator may be the first measure to tell us if we are right.

Chart 1: Composite Activity PMI & GDP

Chart 2: CE BICS Indicator & GDP

Sources: Refinitiv, IHS Markit

Sources: Refinitiv, ONS, Capital Economics


Andrew Wishart, UK Economist, +44 7427 682 411, andrew.wishart@capitaleconomics.com