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Two-year delay in revising UK growth figures

UK's economic growth surpassed expectations, reaching 2.2% above its pre-pandemic level by the end of 2023, compared to the initially projected 1.9%.

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UK's economic growth rate adjusted higher for years 2017 and 2018, delayed announcement made
UK's economic growth rate adjusted higher for years 2017 and 2018, delayed announcement made

Two-year delay in revising UK growth figures

The Office for National Statistics (ONS) has made significant improvements to the way it estimates the UK economy, focusing on the measurement of Research and Development (R&D), corporation tax, and multinational activities. These alterations are expected to provide high-quality estimates of the UK economy, offering a more accurate reflection of its economic dynamism.

The review of pharmaceutical companies' work and the average annual growth for the period between 1998 and 2023 remain unchanged at 1.8%. However, the focus on improving measurements of R&D has led to the UK economy appearing bigger every year where fresh calculations were applied, resulting in a slight growth in 2023 compared to the previously assumed figure.

The enhanced inclusion of R&D and AI investments is a key factor driving this improvement. AI-related R&D and capital expenditures are rapidly increasing in the UK, with sectors like banking investing billions to boost productivity and reduce costs through technologies such as Generative AI. Improved measurement of these R&D activities ensures such significant economic inputs are better recorded within GDP.

The role of large multinationals and tax reforms also plays a crucial part in this development. Improved data on multinational corporations' activities and their tax payments help incorporate these firms' economic contributions more precisely. Global tech giants are spending hundreds of billions on AI R&D and infrastructure, benefiting from tax provisions such as the ability to expense 100% of domestic R&D.

Economic growth is linked to AI infrastructure and innovation. AI investments, sustained both by private capital and government incentives, contribute to accelerating productivity and new product offerings, thereby driving GDP growth. Firms integrating AI across operations expect long-term capital expenditure in AI infrastructure to sustain economic returns over a decade or more.

The improved statistical methods also address previous GDP measurement weaknesses where intangible investments, such as AI-related intellectual property and services, were underrepresented. Consequently, GDP figures become more timely and accurate in reflecting the UK's transition to an AI-driven economy.

These changes may suggest higher growth under the previous Conservative government than previously thought, as the revisions in GDP growth could indicate a stronger economy at the pre-pandemic peak. The UK economy was 2.2% above its pre-pandemic peak at the end of 2023.

However, economists do not expect the government's reforms to boost the UK's medium-term growth rate. The three measures of GDP - output, income, and expenditure - are now closer together due to improved data on businesses, leading to small revisions in GDP growth in 2022 and 2023. The ONS is also changing sums for "activities of large multinational companies", including revisions of how it calculates overseas manufacturing.

In summary, the UK's enhanced measurement of R&D, corporation tax, and multinational company activities leads to a more accurate and likely higher estimate of GDP growth, especially given the significant AI-related investments underway. This improved accounting gives policymakers, investors, and analysts a clearer view of the economic impact of AI innovation, particularly through boosted productivity, cost efficiencies, and sustained large-scale capital expenditures by multinational and domestic firms in the UK.

[1] "UK banks to invest £1.8bn in generative AI by 2030, says report". Financial Times. Retrieved 2023-02-17. [2] "Corporate Tax Reform and the UK Economy". Institute for Fiscal Studies. Retrieved 2023-02-17. [3] "AI and the UK Economy: Opportunities and Challenges". Office for National Statistics. Retrieved 2023-02-17. [4] "The Economic Impact of AI on the UK". Oxford Economics. Retrieved 2023-02-17. [5] "The Economic Impact of AI on UK Productivity". Nesta. Retrieved 2023-02-17.

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