David Smith’s Sunday Times column discusses the drag on GDP from falling North Sea oil and gas production. Such production fell by 35.6% between the second quarter of 2009 – the recession trough – and the third quarter of 2012. With the sector accounting for 2.0% of the economy in 2009, this decline subtracted 0.7 percentage points from gross value added (GVA)*. Put differently, GVA has risen by 3.7% since the trough but GVA excluding oil and gas extraction (“non-oil GVA”) has climbed 4.5%.

The fall in North Sea production, of course, pre-dated the recession. Output peaked in the first quarter of 2000 and had declined by 47.1% by the second quarter of 2009.
 
The North Sea effect is neglected in unflattering comparisons of recent GDP / GVA performance with previous recessions / recoveries, when oil and gas production was stable or rising. The chart overlays the path of non-oil GVA in the late 1970s / early 1980s on the current cycle, aligning the two pre-recession peaks**. The peak-to-trough falls are identical – 6.3% – and the current recovery was tracking the early 1980s upswing until the third quarter of 2011. Over the subsequent year, however, non-oil GVA has risen by just 0.2% versus 4.0% at the corresponding point in the early 1980s (i.e. between the fourth quarters of 1982 and 1983).

The reasons for this shortfall, of course, are hotly debated. The explanation offered here is a combination of GVA mismeasurement (i.e. recent numbers will be revised up, though possibly not for many years), an inflation squeeze on real money in 2011 and weaker Eurozone export markets. The Keynesian claim that fiscal austerity bears responsibility is at odds with the timing of underperformance  – the fall in cyclically-adjusted net borrowing was similar in 2010-11 and 2011-12, according to the Office for Budget Responsibility (i.e. 1.5% and 1.4% of GDP respectively).

Economic prospects are judged here to have improved significantly as a result of recent stronger real money expansion and an incipient global upswing. The level of non-oil GVA may remain below the early 1980s path (at least pending data revisions) but the growth rate may reconverge. This suggests a 2.0% rise in non-oil GVA between the fourth quarters of 2012 and 2013 (i.e. equal to the gain between the first quarters of 1984 and 1985).

*GVA is the output / income measure of domestic product and excludes indirect taxes and subsidies.
**The 1970s / 1980s path is based on an earlier data vintage. Statistics calculated on the current basis are due for release in early 2013.