National accounts data are subject to continuous revision. Over time the inclusion of new data and methodological improvements can materially change the profile of GDP growth and its composition. In this box we look at the contribution of net trade to GDP growth following the last two large depreciations of sterling: the roughly 15 per cent drop in the effective exchange rate between the third quarter of 1992 and early 1993; and the roughly 25 per cent drop between the final quarter of 2007 and early 2009. In both cases the latest data suggest that the depreciation was associated with a bigger boost to GDP from net trade over the subsequent three years than earlier data suggested.
Following the 1992 depreciation, the Office for National Statistics initially estimated that export growth increased GDP by 5.2 per cent between the third quarter of 1992 and the third quarter of 1995. Subsequently this has been revised up to 5.9 per cent. Growth in imports over the same period was originally assumed to have reduced GDP by 3.6 per cent and this figure has been revised fractionally higher to 3.7 per cent. Taking both elements together, the improvement in net trade over these three years is now thought to have increased GDP by 2.2 per cent, up from an originally estimated 1.6 per cent.
Exports grew much more slowly following the 2007 depreciation than they did in the early 1990s, even though the fall in sterling was significantly bigger. This mainly reflects weaker global demand, though the depreciation did less to boost the UK’s share of world export markets than the previous depreciation. Imports actually fell, primarily reflecting the weakness of domestic spending in the UK. The net result was an improvement in net trade that is currently estimated to have increased GDP by 2 per cent over the three years, a slightly smaller boost than in the early 1990s despite a significantly larger depreciation.
That said, as in the early 1990s, the net trade boost to GDP following the 2007 depreciation has been revised up from the original estimate. Export growth is now thought to have increased GDP by 0.8 per cent rather than reducing it by 0.3 per cent, while lower imports has increased GDP by 1.2 per cent rather than 1.4 per cent. The total contribution to GDP from net trade has thus been revised up from 1.1 per cent to 2 per cent.
Table A: Contributions of net trade to GDP growth
The weakness of the original estimate for export growth between 2007 and 2010 looked particularly puzzling, given the scale of the depreciation. Given the more recent behaviour of sterling and global demand, export growth since 2010 also looks puzzlingly weak in the current data and it will be interesting to see if this too is revised higher.
This box was originally published in Economic and fiscal outlook – March 2013