Professor Diane Coyle explains that the latest, disappointing, GDP figures tell us little about what is actually happening in the economy. That won’t stop them being used by all the parties in the last days of the General Election campaign.
It was no surprise that the General Election spin machines should try to put their particular interpretation on the latest statistics for the increase in Gross Domestic Product, the measure of economic growth. The Office for National Statistics announced that its first estimate (of three) for economic growth in the first quarter of 2015 was a 0.3% increase.
City economists variously pronounced this either a blip or a disappointment, just as party campaigners spun it as either a temporary modest slowdown in a bright spot in the global economy, or a sign that the Coalition’s economic plan was not going to plan. If people did not take these figures so seriously, the scope for these contrasting interpretations would be funny. As funny as the alternative interpretations on the previous set of GDP figures, published right at the start of the election campaign. They were the third estimate of GDP growth in the final three months of 2014, which was revised up by 0.1 percentage points to a 0.6% increase over the quarter. The headlines – depending on the orientation of the newspaper – painted this as either 2014 showing the fastest growth for nine years, or evidence of the slowest recovery in UK living standards since the 1920s.
The reason for amusement – or perhaps despair – about the divergent stories told about the economy is that in statistical terms none of this counts as news. The calculation of GDP figures depends on combining the results of many different sources of data, which are all provided with degrees of error, adjusting for normal seasonal variation and calculating the division of the figure in pounds and pence into inflation and ‘real’ components. There is a large margin of error around every quarterly growth figure. These are not published, but the average revision is 0.1 percentage points (on figures that might be something like 0.2 or 0.5%).
Revisions can be much larger at a time when the economy is at a turning point. The Bank of England publishes a chart in its Inflation Report showing the uncertainty around past figures for GDP as well as around its forecasts for the future. In its February Report, it showed a 90% probability that GDP growth then was in the range 1% to 5%. That’s a wide range indeed. If GDP growth is 1% a year, it takes 70 years for living standards to double; if it’s 5%, just 14 years.
There is more than the question of the margin of error in the GDP statistics, however. Should GDP growth really be the totem it has become in political debate? There are two issues with this. One is that it takes a narrow perspective on what we consider to be economic success or failure. To judge whether or not living standards are rising, the distribution of growth matters – and Thomas Piketty’s 2014 bestseller Capital in the 21st Century clearly struck a chord by highlighting the issue of inequality. What’s more, certainly for advanced economies, people are more and more interested in other dimensions of progress, many of which are now tracked by the Office for National Statistics in its quarterly publication on Economic Wellbeing. This includes, for example, environmental indicators and the possible trade-off between GDP growth now and the quality of the environment in future.
The second issue is the extent to which party political choices actually do influence the rate of economic growth. The day to day debate often focuses on fiscal policy – on which, as the Institute for Fiscal Studies has pointed out forcefully, all parties’ plans are light on detail, and indeed the Conservatives have just pledged to give up much of the scope they have to change taxes anyway. When it comes to other areas of policy, the campaign has sometimes looked like a competition to come up with the worst possible ideas. For example, the Conservatives’ new right to buy policy and Labour’s lower stamp duty for first time buyers, plus new restrictions on rental properties, certainly contend for this title, as both will increase demand for housing while reducing supply. This is the opposite of what is needed to address the housing crisis.
The campaign altogether has seen little engagement with the puzzle of low productivity growth in the UK and what might help achieve higher long run economic growth. This is not perhaps all that surprising, as this would involve what economists often describe as ‘structural reforms’, a jargon term for what candidates would see as politically unpopular policies – such as building housing on green belt land or high density flats, or investing more in rail lines that will pass through somebody’s garden, or removing distortions in the tax system. Policies like these can affect the economy’s growth rate, but they are neither easy nor fast. Nor is it always easy to know what the growth rate is, at least without the benefit of considerable hindsight after all the revisions have come in. None of this will stop the claims and counter-claims about GDP growth for the final week of the General Election campaign, but they should be taken with even more than the usual grain of salt.