Wednesday, 30 April 2014
What is Gross Domestic Product anyway?
The United Kingdom's economy is growing again - consistently and strongly. No other message can be taken from Tuesday's Gross Domestic Product figures, which showed that the British economy is motoring ahead at about three per cent a year. It's a head of steam that seems to be gathering (a bit) and it's some way ahead of the historical trend rate of growth, which usually settles at something like 2.5 per cent a year.
But let's stop for a minute and consider what the number means. It's a measure of final output, domestically inside the UK's economy - as it says on the tin. But it misses a lot, and it can mislead. A huge amount of productive activity lies outside its remit - domestic labour within the family, for instance, increasingly important as more and more citizens. have to look after their ageing parents and grandparents. The black and grey markets is another example: the best estimates of the former are between 10 and 12 per cent of output, and registering the changes in this important sector of the economy is necessarily very difficult indeed. It's difficult to measure and count scientific and cultural progress except by crude cash inflows, which don't really do them justice - explaining what that's work that the US authorities are only just embarking on.
And, most of all, GDP doesn't tell us about the shape and style of production - its warp and weave, if you will. How it feels to live somewhere is really a factor of access to basic rights and services, on which the UK on one measure stands a (not too shabby) thirteenth in the world. Still, it's clear that there is more to be done if the electorate is to actually experience a recovery, rather than being told about it by self-congratultory politicians. The rise of zero hour contracting is just one example, making many workers feel as if they are existing, hand to mouth, rather than being valued as employees. Many Britons will welcome the flexibility granted by such work, of course - but many will not. The role of intermediate rather than end-point production in the economy, often chugging along steadily when headline GDP figures are caving in, and not expanding as quickly as final demand calls for in the good times, is usually a counterbalancing factor in busts and booms - one that isn't well captured in the 'big number' announced by the Office for National Statistics (ONS). And so on.
Now all good economists and statisticians know this, including the ONS. They've launched a 'dashboard' of seven different ways of supplementing GDP (opens as PDF), including such variables as real household disposable income. It's worth saying that the pit we've fall into looks even deeper on some of these measures (as families have run down their savings and reserves, and real wages have fallen) than it does using the raw GDP figures. That means it's going to take even longer than we thought to climb out.
Most of all, if we look at GDP per capita, the economy has not really recovered much at all - and is still way below its pre-crisis peak (above). More workers are arriving, or moving into the workforce, and producing more. But they're not taking home more money - hence the very bad household income figures.
The British electorate are feeling insecure, misunderstood, poorer than their parents and no richer than they were about a decade ago. No wonder they're angry; no wonder previously fringe protest parties such as the United Kingdom Independence Party are on the rise. No wonder the governing Conservative Party languish in the polls.
It's important to read the statistical small print. The economy is growing. But Britons are not getting wealthier, they're not saving more, they're not becoming more secure. Their real incomes have just begun to rise, quite slowly, after years of falling - and even that effects fades to nothing if we exclude London, and City bonuses, from the mix. It is, in some ways, quite a doleful picture - and one quite different from an understanding based on the crude measure of GDP alone.