Today the Office for National Statistics delivered its first estimate for the UK’s GDP in the second quarter. With a fall of 0.7% they were a bit shocking – we have had a number of quarters with it being cose to no change, and this looks like a proper lurch downwards. This has provoked some predictable “told-you-sos” by the government’s critics, who say that it shows that the Coalition government’s policies are failing, and call for less austerity. But what do the figures actually mean?
Making sense of it all is not easy. The first point is that GDP is not of huge importance in its own right – only as a proxy for the population’s overall wellbeing. But in a dveleoped economy this latter is more closely tied to employment – and here that statistics seem to be slowly moving in the opposite direction. This has created a headache for economists, since this behaviour isn’t in the script. Some even say that the GDP figures may be in error. But they have been saying this for some time now, and revised estimates have not made the figures any better. We need more evidence from the real world to see if anything very harmful is going on. If, for example, the decline in GDP is a result of a shrinkage of investment banking, where they is lots of money and few jobs, we needn’t lose any sleep. Or if it results form people taking time off, e.g. for the Jubilee holiday, then again it is no real cause for concern – provided people enjoy their time off. The truth is that we don’t have a clear understanding of what is happening, and whether it is in fact particulalry bad.
Well, not quite. We rely on money income, measured by GDP, to generate taxes to fund the services and benefits supplied by the state. And to pay off the debts left by past governments. Given that taxes still fall well short of what they are supposed to pay for, this is a worry. For now things are OK. The financial markets aren’t taking fright (even as they are in Spain, whose finances are not in such bad shape). If they do then we can expect all sorts of nasty consequences as interest rates rise, and possibly inflation too.
But what of the argument that austerity is slowly strangling the economy, and we need to ease off? This is a topic that I have blogged about many times before. The austerity sceptics are those who basicly think that a sustainable economy is within our grasp, and it just needs a bit of confidence and an upward demand cycle to reach it. I remain sceptical. Slowing austerity may simply be postponing a necessary adjustment – and runs greater risks with those financial markets. These figures do not provide additional evidence either way on this debate.
The problem for the government is that GDP – and tax income – is falling behind their projections, which makes it look like a failure. But this is more a criticism of the art of economic forecasting than it is of government policy. But economic forecasting has long been known to be inaccurate, and it always will be. Many people, on both sides of the austerity argument, are not surprised that the recovery is so slow. And the forecasts weren’t even politically motivated – since the government transferred responsibility to an independent body – the Office for Budget Responsiiblity.
Still, the case for using the government’s weight to progress worthwhile investments in house building, transport infrastructure and education remains strong, and no doubt their advocates will use this data to pressure the Treasury to loosen up. But these investments must be for items that will be of genuine benefit – the right sort of homes in the right places, for example – and not just expenditure for its own sake. And that makes the process slow.
So, in short, these GDP figures are nothing to get excited about.