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Dominic King asks how much we should read into national accounting statistics
The second quarter of 2014 brought a raft of very cheery economic news. The pace of growth in China kicked back up to 7.5% following a mini-stimulus from the government, which included speeding up infrastructure project approvals, tax relief and credit easing. The United States roared back after a particularly bitter winter to post 4.0% growth (at the annual rate). Spain was buoyed by news that growth had accelerated to 0.6% (from the previous quarter) and the unemployment rate has started to fall.
But how much should we read into the GDP numbers? In the years following the financial crisis, the quarterly release became a bizarre battleground in many developed economies where the success or failure of economic policy was defined by which side of zero the growth figure emerged on. But the first estimates are calculated when fewer than 50% of business returns have been received. The figures are constantly being revised, so there is more confidence in subsequent releases, but the bulk of the noise from politicians and the media comes from the first estimate. Calculating GDP is also a notoriously difficult task. Government statisticians in Nigeria were pleased to announce earlier this year that their economy had grown by 89% overnight, after output was rebased to include sectors such as telecommunications and the film industry.
Statistical agencies in the developed world can justifiably claim to provide more accurate data but keeping pace with advances in technology and the digital economy is as tough for statisticians as it is for regulators. The UK statistics agency, the ONS, recently announced plans for a change in its national accounting methodology which will double the savings ratio; the United States underwent a similar exercise last year, adding 3% to the size of its economy. Jonathan Haskel, professor of economics at Imperial College Business School, says: “the ONS is probably doing the best it can.” Hardly a ringing endorsement.
Whether GDP figures mean much to those whose salaries have failed to keep pace with inflation over recent years or whose benefits have been cut is also debateable. Venezuela recently trumpeted growth of 1.2% for 2013, which must have seemed a poor joke to the thousands unable to buy food staples due to foreign exchange controls introduced by the government; the very controls which restrict imports giving the rather disingenuous impression of rising wealth.
But animal spirits are a curious thing: a positive economic growth trend may give businesses the confidence to take a risk; to invest in that piece of machinery, make that acquisition, develop that new product or hire that new person. Consumers may be inspired to buy that car or take out that mortgage expecting their wages to keep pace. What looks increasingly like a house price bubble in London and the southeast of the UK has its origins in the raft of positive economic data produced over recent months as much as it does in the lack of new construction and the influx of foreign capital.
The release of GDP data therefore has ramifications beyond the realms of economists and politicians. Positive news can boost the spending plans of households and businesses, driving growth and becoming self-fulfilling; a virtuous cycle you might call it. For now the global economy seems to be moving onto a more sustainable footing (despite pockets of conflict and the perennial spectre of the eurozone crisis) with business investment and consumer spending creeping upwards. Long may the good news continue.