Friday, 27 July 2012

GDP a misleading indicator

Hamish McRae echoes the doubts of many of us over the reliance on GDP alone as the indicator of a nation's economic health. I became sceptical in January when one of the financial pundits pointed out that a contributory factor to the fall in GDP in the last quarter of 2011 was the cut in retail fuel costs. Since then, we have had reported rises in UK employment, predominantly in the private sector. Yet the Office for National Statistics reported a further decline in GDP in the last quarter, and stated that the usual period of revision was not certain to show an improvement. The horrendous weather in the period hit the construction industry particularly hard, but that hardly explains the downturn across the board. (The ONS bulletin as a pdf file is here.)

Mr McRae writes:
By coincidence, within a few minutes of the GDP release yesterday the CBI produced its quarterly industrial trends survey. This is what the CBI said in its introduction to this: 'The UK manufacturing sector is showing resilience in the face of challenging economic conditions, with orders and output growth steady…Both measures of activity indicated modest growth in the three months to July, while manufacturers' optimism about the general business situation was broadly stable relative to the previous three months.' This comes on top of extremely encouraging employment figures, which showed in the three months to end-April, the private sector added a net 205,000 jobs, the second-highest rate of job creation ever. This is not [...] consistent with a shrinking economy. We are getting close to the peak in employment at the top of the last cycle, though officially the economy is some 4.5 per cent smaller. As Chris Wilkinson of Markit points out, if the official figures of GDP were correct the UK economy would be shrinking faster than Spain's. Not even the most unutterably dismal economist could think that is the case.

It is certainly not cause to go chasing headlines with a quick fix. Cutting the VAT rate would no doubt pump up GDP again, but at the cost of sucking in exports. VAT is a regressive tax, and in my opinion should be reduced permanently once the deficit is under control, but a temporary cut is more trouble than it is worth to small businesses.

Contrary to what Ed Balls has been saying the plan is working. It is working more slowly than anticipated because of the unforeseen attack on the eurozone, a symptom of which is the shut-down for four months of Honda's Swindon plant, which relies on sales in continental Europe. Labour insisted around the time of the 2010 general election that they should not be blamed for the effects of the "global" recession  (in truth, a transatlantic recession). It is therefore hypocritical of them to accuse the coalition government of creating the double-dip.

Certainly the coalition was too quick to cancel capital projects - though as indicated in my earlier post, it was right not to go ahead with PFI schemes which would merely push our deficit troubles over the horizon. If HM Treasury had possessed a functional crystal ball, they would surely not have done so. (The same could be said of Alistair Darling, Labour's last chancellor, who planned cuts £1bn more than the coalition did.) The coalition has, though, responded with the go-ahead for railway electrification, work on which has started, and which Labour repeatedly ducked.

I believe that a LibDem government would not have "front-end loaded" the public sector job cuts. It would thus have eased the pain of transition to more commercially-orientated employment. I would also like to think that it would have accelerated the raising of the personal allowance, thus pumping money into the economy where it would do most good. At least in coalition we have prevented the much greater pain which would have resulted from the huge public expenditure cuts offered by the Conservative manifesto.

Plan A is not ideal, but it has the confidence of the international money markets, a confidence which the Labour government had lost.

It will be interesting to see what the July economic statistics are. The change for the better in the weather in the middle of the month may produce an upward blip in GDP. What will Mr Balls say then?

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