Why did our GDP growth leave the country?

It’s official then. Per capita GDP is now back to its pre-crisis level. Does that mean we can finally say the aftershock of 2007-08 is over?

Not quite. Alongside its GDP measures, the ONS also calculates Net National Disposable Income (NNDI) – the income payable to UK residents. This is effectively GDP minus income owed to foreign residents plus income from abroad owed to UK residents.

[N]ot all income generated by production in the UK will be payable to UK residents. Some of the capital employed will be owned by non-residents and they will be entitled to the return on that investment. Conversely, UK residents receive income from production activities taking place elsewhere, based on their investments overseas. Adjusting for these flows gives a measure which is better focused on income rather than production.

And, according to yesterday’s ONS figures, per capita NNDI is some way below per capita GDP and still short of where it was before the recession.

In Q2 2015, NNDI remained 2.5% below its pre- economic downturn level; this is compared with GDP per head which was 0.6% above its pre- economic downturn level in the same quarter.

Screen Shot 2015-09-30 at 14.14.55

As the ONS explains:

Since late 2011, there has been a fall in the net earnings of foreign direct investment (FDI) (the difference between earnings from direct investment abroad and from foreign direct investment in the UK). This fall has resulted in net UK foreign direct investment earnings becoming negative for the first time since Q4 2008. This deterioration is attributed to both subdued earnings for UK residents from direct investment abroad and an increase in foreign earnings on direct investment in the UK.

Although GDP rose, once foreign residents took the profits from their investments, the amount left for everyone else barely moved. In short, much of our GDP increase left the country. This helps to explain why, despite economic growth, people weren’t feeling any better off.

In the last two quarters this gap has started to close and pay is rising, so more people are, at last, starting to see the benefits of the growing economy. But how come the gap between GDP growth and NNDI widened after 2010-11?

The ONS reports a jump in the percentage of UK-based companies owned by foreigners after 2010, which might explain some of it, but that just raises another question. Were more foreigners investing in the UK or did the British just lost their appetite for investment?

Screen Shot 2015-10-01 at 08.18.42

If anyone can throw some light on this I’d be interested to hear your thoughts. Why, despite some years of economic growth, has it taken so long for UK residents to start seeing the benefits? Answers in the usual place, please.


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6 Responses to Why did our GDP growth leave the country?

  1. SK says:

    Related to GBP weakness?

  2. Interesting, thanks, but
    (i) what is the relative scale of FDI (+ and -) indirect I via stock market?
    (ii) these international flows of course include rents along with profits – and ? hard to separate. We generate so much rent as a nation!
    (iii) the notes to Fig 3 are missing.

  3. Dave Timoney says:

    One possible explanation is that productivity growth has been significantly higher among foreign-owned companies in the UK, so the FDI sector is responsible for a disproportionate share of GDP growth. If this sectoral rate of growth exceeds the rate of growth on UK assets abroad, then you’d expect to see a depressed NNDI. The implication is that the UK’s recent “productivity problem” reflects company policies, not the dynamism or skills of workers.

    We also know that UK companies have tended to reinvest less of their foreign earnings abroad and instead repatriate the capital, largely due to changes in the tax regime in 2009 (the FT did a useful analysis of this late last year) plus ongoing cuts in corporation tax. However, this has not led to a resurgence in productive domestic investment (hence the continuing poor productivity growth). Too much of the capital appears to be going into property, share buybacks or simply sitting on balance-sheets as cash.

  4. Very interesting piece. I believe the problem is a low demand economy caused by too much structural saving (due largely to high private sector debt levels and corporate rent seeking). The government needs to spend more to keep enough money flowing through the economy but won’t quite do it, so we are relying on more mortgage debt and rising asset prices to increase money flows. The pushing of the unemployed into low paid work has got people working (good) but the lack of demand has meant that it is a rise of low productivity labour (bad). More here: http://www.notesonthenextbust.com/2015/06/the-uk-employment-miracle.html

  5. Bónapart Ó Cúnasa says:

    It’s the euro-area crisis. The UK used to make reliably good returns on FDI in the euro area which has dried up since 2010. The BoE had a bit of analysis on this a while ago: http://www.bankofengland.co.uk/publications/Documents/inflationreport/2014/ir14may2.pdf

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