Something akin to panic has set in over the latest readings for Gross Domestic Product. Might we be staring into a misleading mirror of economic performance? What alternative might there be for a more realistic, timely and useful check of our economic pulse?
Today doubt and despair abounds. Latest readings show UK GDP growth was limited to just 0.1 per cent quarter-on-quarter in the first three months of the year – the weakest performance since the first quarter of 2012 and down from the 0.4 per cent expansion achieved in the fourth quarter of 2017.
Some have blamed disruptive winter weather. Others point to the continuing squeeze on household incomes and “austerity”. Brexit also gets a look-in. And there is talk that this poor performance could extend across the whole of 2018. This confusion over what GDP “means” is heightened by the disruptive effects of the internet and digital technology transforming the way we live and work: conventional GDP measures are struggling with this.
In David Pilling’s compelling account, The Growth Delusion, the invention of GDP can be traced to the 1930s and the work of a Russian émigré data analyst Simon Kuznets. He became the high priest of economic measurement in the Roosevelt New Deal era.
Working with three assistants and five statistical clerks, his 1934 report to Congress was heavy with caveats: he warned that an economy could not be reduced to a single statistic; the work was only a well-considered guess; the national welfare could not be inferred from a single measure. But it received national attention for its central finding that in the three years following the Wall Street crash the US economy had almost halved in size.
From the start there was disagreement over what should be included in GDP: Kuznets sought a measure of welfare, not just activity. He opposed including government spending in GDP, and certainly not defence or war expenditure.
Maynard Keynes changed all that. And the debate about what GDP “is” continues to rage. When the Italians included the untaxed “black” economy in 1987, its GDP shot up to overtake that of the UK – giving rise to the proud boast of “Il Sorpasso”. More recently, two UK economists, spurred by admonitions from Eurostat, had a stab at estimating the size of illegal drug trafficking and prostitution (an additional £9.7 billion to GDP, since you ask).
But the definitional challenge today is greater than ever. We now work more efficiently and effectively with vastly more information as a result of the dramatic changes wrought by the internet and digital technology. This would suggest GDP should be higher. But this measure has always been biased towards clunky physical products – if it falls on your foot and hurts, that’s GDP; if it’s a wireless mouse, it isn’t.
But has the internet made the economy larger – or smaller? As Pilling vividly illustrates, we have made many activities redundant. We do not need big offices so much; we handle our own travel bookings online, punch in our own boarding pass info; handle our own bank account transfers online, bringing the closure of thousands of bank branches. We shop online, closing many high street outlets with the loss of sales and support staff…
As for inflation, this has been brought down by continuous improvements in mobile and internet technology. And if inflation is lower, shouldn’t GDP be higher?
I cite all this as a cautionary reminder that we should not obsess on one GDP number as a measure of our economic pulse. So while the boffins fine-tune the statistics, what can we use?
Now, of course, there is no such thing in a modern economy as a single pulse rate. There are many pulses. But I would single out a few that can be measured on a monthly basis and the result brought together on an activity sheet or score card that would give a more immediate and dynamic reading of how the economy in Scotland is faring.
What pulses might we monitor on such a score sheet?
For example, it would include latest labour market data – employment, unemployment and unfilled vacancies; latest available figures on average earnings and comparisons with a year ago; business incorporations and planning applications in our major towns and cities; retail sales data; announcements on Foreign Direct Investment; traffic volumes at airports; housing starts and completions; and latest PMI readings or a business confidence index such as that produced by the Scottish Chambers of Commerce.
Impossible? But it can be done – it is being done – and there is an excellent example to hand. See Edinburgh City Council’s Economy Watch – a six to seven-page monthly summary of the latest data on all these fronts pertaining to the Edinburgh city region with a summary front page with arrows – up, down or sideways – indicating the direction of data.
It is a wonderful pulse-check on the capital’s economy – several important pulses in fact – and provides an immediate and up-to-date ready reckoner on business activity in the city. It has been going for several years and, after a brief suspension, is set to come back over the next two or three months.
Almost all the data is already available and requires little fieldwork. But it brings different indicators together in one convenient reading.
Now, you may think that this is a journalist’s cop-out – no original research, no mass of raw data to wade through, no complicated analysis and all the emphasis on the immediate and the instant. Well, all of that is true. But it would be a useful tool for business, for policymakers and for lay members of the public, and help bridge a gap in the way we currently present our economy to the world. It cannot hope to match the brain scan equivalent of the GDP, but would provide an interim snapshot of current activity and data.
Time, then, to take the pulse – and get a more timely, accessible and up to date reading of how our economy is faring.