How pretty is the UK without the "bad bits"?

City skyline The City of London: One of the "bad bits"?

One of the things that companies routinely do is state their financial results without the bad bits.

They typically call this presentation "underlying" profit or the profit of "continuing activities".

The respectable reason for showing these figures is that they give shareholders and the world some idea of what the relevant company would look like, once it has chopped out all the rotten bits.

The disreputable reason is that some boards hope that investors will forget that the bad stuff is real, still inside the company, and shrinking the owners' wealth.

You may have noticed, for example, that on the basis of the activities RBS wants to keep, it has been looking in rude health for some years (well almost).

But once the losses on rotten assets are included, bargepoles spring to mind - and for the avoidance of doubt, I am only citing RBS because the scale of the rot it needs to cut out is so great. I am not suggesting it is trying to cynically manipulate perceptions (in fact occasionally I've wondered whether some of its top people actually enjoy wallowing in the red ink they've spilled).

All of which has made me wonder what UK PLC would look like on a "continuing" or "underlying" basis, without the bad stuff?

I am not talking about wishing away the household, business, financial and public sector debt that has been bearing down on economic activity since 2007.

What interests me is what UK output would look like if big sectors in long term decline were excluded.

Here is the thing. For some decades, the British economy has been disproportionately dependent on financial services and North Sea oil and gas extraction - both of which are in serious decline.

Of course not all of the City and finance is shrinking. What has been disappearing is an industry in which we were a world leader - the manufacture of what the FSA chairman, Lord Turner, called socially useless financial products, or the sort of complex derivatives that did the opposite of what they said on the tin (they were supposed to augment investors' wealth, but were a fast route to ruin).

Start Quote

Britain without the bad bits looks prettier than the eurozone, but uglier than the US”

End Quote

Meanwhile, as banking around the world has reverted to becoming more national and less international again, the City - as the world's most open and global financial centre - has suffered.

Also there are pockets of the North Sea still gushing. And who knows whether, in time, we will become big frackers?

But if we assume that we had too many eggs in the energy and finance baskets, and these sectors will continue to shrink for years as a proportion of the economy, what does the UK look like without them?

Now as it happens, the Treasury has sent me the work it has done on this.

It has adjusted UK gross value added, a measure of economic output, to exclude energy extraction and use, and also financial and insurance activities.

What this shows is that the rest of the economy is in better shape than many might believe, if not in the rudest of health.

So, for example, on the basis of conventional GDP, UK output is still 3% below the peak it hit at the beginning of 2008 (making this, as Stephanie and I have said many times, the longest depression in a technical sense for at least 100 years).

By contrast UK GVA or output without the bad bits, without finance and energy, is almost back to peak output. At the end of 2012, it was 0.7 of a percentage point below its peak in the first quarter of 2008.

That compares well with the euro area as a whole, whose GVA on the same basis is down 2.9 percentage points over the same period.

It is a better performance than the Netherlands and a similar performance to France's. It is miles better than what has happened in the eurozone crisis nations, Italy, Portugal and Spain. And only Germany does a bit better (in its case, output is up by 0.9 of a percentage point).

So on this analysis, UK manufacturing and non-financial services are not doing too badly.

That said, this is not the moment to crack open the champagne.

It is important to remember that the UK has had significant monetary advantages, compared with the more rigid inflexible eurozone, in the post-crash years - a currency, sterling, that could and has fallen to reflect weak conditions here, and a central bank able to price money and create money to meet the UK's challenges.

So British businesses should - and do - perform a good deal better than competitors in countries like Italy and Spain, where the exchange rate and monetary conditions are less accommodating.

Which means there are probably two important points to make. First Britain without the bad bits looks prettier than the eurozone, but uglier than the US.

And unfortunately we can't magic away the bad bits, finance and energy.

They will be with us for years to come, powerful headwinds acting as a brake on recovery.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

How Labour pays for student fee cut

Labour would reduce tax relief for those earning £150,000 or more a year, shrink maximum pension pots to £1m and cut maximum annual pension contributions to £30,000 to pay for a cut to £6,000 in student fees.

Read full article

More on This Story

More from Robert


This entry is now closed for comments

Jump to comments pagination
  • rate this

    Comment number 543.

    542. All for All
    Please note, that AllforAll does not explicitly say that democracy is bad if it permits slavery if the majority approves it. He has never said he is against slavery, and has not said if a majority in any form of democracy approve it, would that slavery be immoral.

    AllforAll seeks tyranny of the majority, at the expense of the minority. All equal indeed, unless your a minority.

  • rate this

    Comment number 542.

    Bastiat @540

    Only for I think the second time in more than two years of posting here, I have had cause to refer a post, for gross misrepresentation

    Bastiat @540 asserted as my belief, the idea that "democracy" - by himself disavowed, and by myself defined explicitly as EQUAL FREEDOM - "permits slavery if the majority approve it"

    Such conduct 'deserves' remark

  • rate this

    Comment number 541.


    Eventually, you and Steph are getting the message. The UK is doing well. I could reel off lots of stats if you gave me a page.

    Here are a few; new car sales up 8% cf. down 8% in theEZ, highest employment ever, GDP up 0.3% last year despite massive deleveraging, offshore investment at a thirty year high.

    We must measure our success in terms of fixing problems.

  • Comment number 540.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 539.

    538 Faux Geordie

    Yes I remember listening to the senate banking committee headed by Levin, I think, hammering Blankfein over it. I think it was called "one ...... product" You have subsituted the swear word with the word duff.
    It revolved around their big short position. They were shorting the very product they were punting and not disclosing the position either - even denying it's existence.


Comments 5 of 543



  • A very clever little girlBrain gain

    Why are people getting better at intelligence tests?

  • BeefaloBeefalo hunt

    The hybrid animal causing havoc in the Grand Canyon

  • A British Rail signBringing back BR

    Would it be realistic to renationalise the railways?

  • Banksy image of girl letting go of heart-shaped balloonFrom the heart

    Fergal Keane on the relationship between love and politics

  • Don Roberto Placa Quiet Don

    The world's worst interview - with one of the loneliest men on Earth

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.