Lies, damn lies and GDP statistics

Earlier this week preliminary figures for the UK’s second quarter GDP were released, showing that the economy grew at an annualised rate of 0.2%. Both politicians and markets have become slaves to these statistics, the former prepared to alter economic policy to bolster them and the latter attaching significant importance to them. But how important are they actually?

GDP numbers reflect the final consumption of both private and public sectors, to which are added the trade balance and business investment for a given period. This is then deflated to reflect price inflation of all goods and services, and seasonally adjusted. However, there are several problems with this approach.

Firstly, the economic activity associated with the intermediate stages of production is not adequately reflected in GDP, which imparts a statistical bias in favour of consumption, and against production. Over time, this has the effect of driving production abroad, to where the factors of production are more readily available, skewing the economy towards consumption and a dependency on service activities.

Secondly, an increase in government spending financed by deficits raises GDP: socialist governments have used this fact to engineer headline growth. By this trick, Gordon Brown, as Chancellor from 1997 to 2007, was able to make it appear as if the economy was growing at a faster rate than his critics expected. But this “growth” came at a long-term cost to Britain’s economic health.

And thirdly, the easiest short-term fixes for adverse trade balances and business investment are a “competitive” currency and freely available bank credit. The effect of these inflationary policies has been to destroy savings, which are the bedrock of a stable economy.

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