UK economy 2.7% ahead of pre-crisis peak

Britain's economy was 2.7 per cent larger than its pre-crisis peak in the second quarter of this year having regained the output lost in the recession a year ago, the Office for National Statistics admitted on Tuesday after completing the largest national accounts revisions for a generation.

The new data suggest the UK recession was shallower than previously thought, the recovery started earlier and was faster, and household savings are much higher.

While the revisions are not likely to affect the timing of the first interest rate rise significantly, they will come as a worry to public finance experts and politicians because faster growth has not been accompanied with the expected tax receipts.

The ONS also revised the second-quarter growth figures for 2014 higher, with the economy now thought to have expanded 0.9 per cent between April and July.

Part of the huge revisions to the national accounts were caused by a rare move towards more modern international national accounting systems, governed by the 2010 European System of Accounts and the 2008 global System of National Accounts. All rich countries have implemented these changes or are in the process of doing so.

The main effect of the revisions is to raise the estimate of the size of Britain's economy because research and development and weapons manufacturing are counted towards national income for the first time. The ONS has also improved its estimates of the output of Britain's charitable sector, drug use and prostitution.

Together, these changes raise the size of Britain's economy in 2013 from £1.6tr to £1.7tr, a rise of 6.3 per cent.

The vast majority of the revisions to the depth of the recession and the strength of the recovery, however, had nothing to do with changing accounting standards. They were caused by the ONS having a significant change of view about the strength of the economy in recent years.

Instead of the economy plummeting 7.2 per cent from the first quarter peak of 2008 to the second quarter of 2009, it is now estimated to have dropped 6 per cent. It is now estimated to have grown 9.3 per cent since that trough rather than the 8 per cent previously recorded.

Since the start of 2008, the ONS says the real expansion has been 2.4 per cent higher - about the equivalent of a year of normal output growth. George Osborne, the chancellor, will be pleased that the growth rate since the coalition government took office has been revised up from 5.9 per cent to 7 per cent.

Joe Grice, ONS chief economist, admitted that "growth has become stronger over the last 18 months or so", but sought to play down the importance of the changes. "While the changes included in these National Accounts are far reaching, the net difference they make to the path of the economy is limited," he said.

Other significant changes to the methods used in the new national accounts raise the estimated household savings ratio from 4.9 per cent in the first quarter of the year to 5.7 per cent with even bigger changes in previous years. Paul Johnson, director of the Institute for Fiscal Studies, said the changes brought the national accounts more into line with other evidence on the accumulation of wealth by people as they reached retirement.

The changes to the growth of the economy were not confined to estimates of after adjusting for inflation - real growth. There were also upward revisions to the rise in the cash size of the economy since 2010, which will increase concerns that tax revenues are not rising as fast as would be expected. If continued, this would add to the pressures on the next government for increased austerity.

The Bank of England is likely to look through the revisions, saying that if there was no sign of inflationary pressure when growth was higher than previously recorded, there is no need to bring forward interest rate rises. Mark Carney, BoE governor, has made clear that while the Monetary Policy Committee would need to study the revisions, they were unlikely to make a material difference to the BoE's views.

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